Should The Fed Care About Any Of This?

I imagine that innumerable newsletters are writing the equivalent of “the markets are being roiled by volatility.” (When things are being roiled, you know it’s bad.) With the immediate disclaimer that I do not have much in the way of useful market data, I do not see anything that the Fed should immediately care about.

What matters to the central bank is that credit is available to finance capitalist activity. This means that the trip wire for a crisis that it will care about is disruptions to core funding markets. These are money markets, interbank markets, and wacky things like cross-currency basis swaps and repo (admittedly a subset of money markets). The corporate bond market matters, but it is entirely typical for primary issuance to shut down for a few weeks because the loons in the equity markets get loonier than usual. Nobody in their right mind relies on the corporate bond market being available every single working day, and so everybody works in the possibility of planned issuance being temporarily shelved.

The roiling markets are either largely pointless bubbles (AI, crypto), or a new generation of investors learning that the yen goes down by the escalator, and up by the elevator. Although these market moves may end a few careers in finance, the real economy consequences are minimal.

Alan Greenspan paid a lot of attention to equity markets during his span as Fed Governor, and he might have panicked and done an emergency rate cut. However, this sensitivity to the manic-depressive equity market participants was generally viewed as a mistake in retrospect, and I would lean towards the Fed just cutting rates at the next meeting — which was already priced in. If there is an actual emergency that requires hundreds of basis points in cuts, the Fed was already behind the curve to begin with.

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(c) Brian Romanchuk 2024