Daily Commentary

MarketMinder’s View: This screed spends many, many pixels to make a simple point we have long made: Fed decisions are unpredictable. After the Warsh Fed hiked the fed-funds target range by 0.25 percentage point to 3.75% - 4.00% yesterday, many presume this is the first of multiple. But this isn’t a given, as back in March 1997, then-Fed Chairman Alan Greenspan did a “one-and-done” rate move. “Like Greenspan, who was known as the ‘Maestro,’ rookie Chair [Kevin] Warsh finds himself in fine-tuning mode. Squint past the noise of volatile oil prices and other temporary factors, and underlying inflation may be as low as 2.3%-2.7%—above the 2% objective, but hardly an inferno. Warsh’s problem is that it’s been above target for five and a half years and is no longer cooling, and it probably needs a nudge to resume its 2022-2024 disinflationary trend. Greenspan’s calibration challenge was similarly nuanced: Economic growth was strong and unemployment had fallen sharply. Policymakers wondered if the economy was at risk of overheating, triggering inflation down the road.” Now, we don’t know Warsh or the rest of the FOMC’s rationale for hiking yesterday. Perhaps it was because of the latest inflation trends; maybe it was to buttress central bank credibility and safeguard the Fed’s independence; it might even be for some reason nobody but the voting members themselves will know until meeting transcripts arrive in five years. But the upshot: While we think a hike is a mistake, it isn’t a disaster for the economy or markets right now. However, whatever their reasoning, going too far with the hikes could risk inverting the yield curve and tightening credit—a negative worth monitoring for. For more, see today’s commentary, “The Ineffectual Fed Hike.”

MarketMinder’s View: Back in July, Japanese Prime Minister (PM) Sanae Takaichi announced a consumption tax cut (lowering the sales tax on food from 8% to 1% starting in April 2027)—a measure aimed at addressing cost-of-living concerns that also stoked worries about rising fiscal deficits. While new policies—especially taxes—grab attention, the details matter. As this article explains, the Finance Ministry is scouring for how to pay for this tax cut. “Roughly ¥5 trillion in funding a year will become necessary to lower the consumption tax rate on food from the current 8% to 1% and then provide low- and middle-income workers with benefits equivalent to the 1% tax rate. The candidate sources for this funding are generated from so-called special taxation measures — incentives to provide tax relief for policy purposes — and the revisions of subsidies. … The Finance Ministry will begin full-scale budget screening, and backlash is expected from companies and other entities that benefit from such measures or subsidies.” Some experts think the government will struggle to find places to cut back and may resort to issuing bonds to fill the revenue shortfall—which will supposedly “deteriorate the country’s fiscal situation.” That seems like a stretch to us and more of a sentiment-driven reaction in line with worries about the weak yen, public debt and rising yields. Contrary to the common recent view, Japan’s fiscal health is fine—a debt crisis doesn’t look likely for the foreseeable future. Rather, the more interesting takeaway is in the conclusion—it will likely be difficult for the government to bring the consumption tax rate back to 8% following this two-year window. The late former PM Shinzo Abe postponed consumption tax hikes twice before, so as with any government policy, don’t presume Takaichi (if she is still in power) will make good on her current pledge to sunset this tax cut. Politicians like nothing more than to extend popular policies to win brownie points with their constituents and like nothing less than being seen as party poopers.

MarketMinder’s View: For those who fret their pumpkin spice latte habit may set back their long-term investment goals, fret not—your consumption of this autumn “treat” (which 40% of MarketMinder’s editorial staff hates passionately) matters a lot less than some other timeless ingredients: time, discipline and patience. Some perspective on that last quality: “The 2020 pandemic crash, which then triggered high inflation and supply chain shocks, led to market swings that knocked some savers out of the 401(k) millionaire’s club. Yet time and again, history shows that investors who held steady through market volatility see their balances recover.” It isn’t that the little things don’t matter, as unchecked splurges can add up quickly. But the bigger costs (e.g., a large monthly mortgage, rent or student debt) weigh on households’ finances (and ability to save for retirement) more. For long-term investors, focusing on the bigger picture and practicing the boring-but-effective habits (save more, be patient as compound growth snowballs) can go a long way in reaching your financial goals.