Keeping score: There were three "invisible" gorillas at the Sept FOMC.
What does it mean for US banks?
An “invisible” gorilla describes the problem of selective attention/blindness in human cognition. Basically, if we are told to focus on something (count the number of times people in white shirts pass the ball to each other on the basketball court) do we fail perceive other unexpected things (like a gorilla running through)?
To be fair, a 50 bps rate cut was a surprise to many, though hopefully not M-FAB readers given that we called it in our pre FOMC post. A European friend now owes me coffee and cream cake pastries on my next visit — which is all in good fun, of course. But best of all, it was terrific fun to analyze September FOMC real time with students and yes, our class shifted our view from 25 bps to 50 bps before the announcement and called it.
So there were three “invisible” gorillas at the September FOMC — what were they?
First, there were no questions at the FOMC press conference about the wisdom of US policymakers embarking on a contemporaneous easing in monetary and fiscal policy.
Effectively, that is what happened this week.
The most recent data from August on the US fiscal position shows a significant widening in the US budget deficit to GDP largely due to spending increases even as the Fed has begun to aggressively cut rates. Just because the Fed does not opine on fiscal policy doesn’t negate the importance of the US fiscal policy stance. The press conference and market’s lack of focus on the interaction between fiscal and monetary easing was by far the most striking “invisible” gorilla of the September FOMC meeting.
So, the US economy is receiving both types of stimulus simultaneously — a situation that prevailed in the 1970s when the Fed made a significant monetary policy error and inflation resurged.
Both the dominance of and recurring underestimation of the importance of fiscal policy remains a crucial theme. After the 2024 election, it is plausible to expect a further widening of the budget deficit.