The Fed is flying blind. Investors don’t seem to care.

livemint.com:

Subscribe to enjoy similar stories. You can spend a lot of time on Federal Reserve kremlinology, analyzing policymaker statements and forecasts. Or you can ignore what they say, and just look at what they do—as markets decided after the Fed’s supersize rate cut on Wednesday.

The basic question is whether half-percentage-point cuts are the new normal. Fed policymakers say not: Only one official predicted cuts of more than a quarter point at the two meetings between now and the end of the year. Two, in their “dot plot" forecasts, predicted no more cuts, and the rest said one or two cuts.

But who cares what they say? Markets got into the spirit of dovishness that Chairman Jerome Powell now exudes and concluded that there’s a decent chance that half a point is the new quarter point. Futures traders set their central case for the end of the year of another three-quarters of a point of cuts, meaning at least one of the two remaining meetings needs to be a double cut for them to make money. By Friday they had priced in a 25% chance that both meetings have double-sized cuts, and the same chance that the Fed does what its median policymaker says and merely cuts a normal quarter-point at each meeting.

The cynic in me supports the idea of ignoring the central bank’s own prognostications, since it is terrible at predicting what it will do. Just this year the median policymaker’s rate forecast has swung from predicting three (normal quarter-point) rate cuts by the end of this year, down to one in its dot plot three months ago, and now back up to four, including last week’s double. Why should investors think this particular prediction is the right one? It’s even worse if you try to look further out.