Powell seems a bit dishonest, he will have to face three questions!

The Federal Reserve opened a rate cut cycle last week with a 50 basis point cut, overshadowing the Bank of England and the Bank of Japan's inaction, driving the S&P 500 index to a new high. As usual, Federal Reserve Chairman Powell answered questions from reporters at the post-meeting press conference. However, the Federal Open Market Committee (FOMC) changing its previous guidance sparked a series of more difficult questions. Here are some of the most important questions. What does data dependency really mean? Powell confidently and casually explained the rate decision, seeming to say "there's nothing to see." This worked: investors reacted positively, dispelling their previous fears that a large rate cut would be a signal of policymakers' panic. But his statement was a bit dishonest. By cutting rates by 50 basis points, the FOMC withdrew the hint that it would start easing from the usual 0.25 basis points. More importantly, the new Summary of Economic Projections (SEP) quietly introduced a significant reassessment of the measures needed for the Fed to achieve a soft landing for the U.S. economy. The new GDP growth forecast is basically the same as in June. Inflation forecasts are lower, unemployment rate forecasts are higher, which does not indicate substantial differences in economic conditions compared to three months ago. However, Fed policymakers believe that the rate path needed to achieve the target is now much lower. Powell might say this is just the practice of data dependency: when data changes, policymakers change their views. He said, "We've considered all this data and concluded that this is the best thing for the economy." If someone questions his changes to the dot plot, he would probably give a similar answer. But there are some problems with this argument. The changes in the dot plot from June to September were significant. Earlier this year, poor inflation data took months for rate setters to reduce the expected number of rate cuts in 2024 from three to one. In contrast, recent labor market data, while slightly disappointing, did not sound any alarms. This doesn't sound like a strong background to prove that the significant dovish shift happening beneath the surface of the SEP is reasonable. Has the Fed lost market trust? The market had long anticipated this rate cut. Despite policymakers insisting that the Fed was likely to gradually ease, investors had been expecting a 50 basis point cut since July. In the end, traders' speculation won out. Currently, the market expects the Fed to reach its forecast terminal rate of 2.9% in September 2025, a year earlier than most rate setters' forecasts. In other words, they expect the Fed to implement about eight rate cuts in the next approximately 12 months, while the Fed itself only predicts six. What does this mean for the Fed? It may mean that the market no longer trusts rate setters. Given the poor performance of the dot plot in accurately predicting the Fed's future rate path, this is reasonable. This raises another question: if their decisions are indeed data-dependent, will they abandon the dot plot? It not only fails to clearly convey policy, **but may also damage the credibility of policymakers ** However, overly dovish markets may be helpful in some ways. Powell made it clear last Thursday that the Fed has not declared victory over inflation. If the market continues to maintain loose financial conditions beyond the Fed's own guidance, the central bank can strike a balance between its dual mandate: maintaining a "rough balance" between the two missions and enjoying the stimulating effects of lower borrowing costs. The risk is that a market correction will eventually come. More optimistically, there are many things to look forward to for anyone not tired of the debate over 25 or 50 basis points. How great is the political risk of decision-making? Presidential candidate Trump is unusually focused on the Fed's decisions. His comments on rate cuts are not surprising. He said, "This suggests that the economy is very bad, assuming they are not just playing politics," some Republican lawmakers share the same view. Trump's running mate JD Vance is unusually cautious. On the Democratic side, Biden called it a "progressive statement" and tried to attribute the decline in inflation to his government policies. Harris simply called it "good news." Powell has a good record of resisting political pressure on interest rate changes. Although he is most remembered for his dispute with Trump in 2019, some Democrats have also tried to influence the Fed's rate decisions. But Trump has previously made direct threats to the Fed's independence. The decision to start a easing cycle on the eve of an extremely tense election is unlikely to endear this fickle former president to the Fed in any way. If Trump wins in the November election, this is another issue to worry about