To investors,

The Federal Reserve is conducting their first meeting of the year today. The market expectation is that the Federal Open Market Committee will keep interest rates unchanged.

I believe this could be a mistake.

The current CPI reading shows 3.4%, which is more than 50% higher than the Fed’s stated target of 2%. From this perspective, the Fed has a 0% chance of cutting interest rates. They want to win the war on inflation and get back to the target.

The CPI data could be wrong though.

Truflation, the leading alternative economic data provider, shows inflation at just under 2% already.

From this perspective, the Fed would have already achieved their target, could claim victory, and should be cutting interest rates now.

But the Fed doesn’t use Truflation data.

The argument to the Federal Reserve has to be rooted in a different angle. You could argue that the real interest rate of the economy is increasing as CPI falls. You could argue that private payroll growth has slowed worse than expected. You could argue that the explosion of articles arguing for a “soft landing” is actually an indicator of a looming recession.

Regardless of which angle you take, the Federal Reserve is unlikely to listen. The data they look at is telling them a different story. Jeanna Smialek from the New York Times explains:

“The United States’ economy grew 3.1 percent last year, up from less than 1 percent in 2022 and faster than the average for the five years leading up to the pandemic. Consumer spending in December came in faster than expected. And while hiring has slowed, America still boasts an unemployment rate of just 3.7 percent — a historically low level.

The data suggest that even though the Fed has raised interest rates to a range of 5.25 to 5.5 percent, the highest level in more than two decades, the increase has not been enough to slam the brakes on the economy. In fact, growth remains faster than the pace that many forecasters think is sustainable in the longer run.”

Those numbers look strong. But remember, that data is backwards looking. It tells us what already happened, not what is about to happen. This highlights the problem with most human-led monetary policy decisions.

No one knows what is going to happen in the future.

We saw the negative side-effect of this during the pandemic. The Fed continued to tell us that inflation was transitory. They took too long to act and inflation eventually went over 9% in the economy. This overshoot of inflation was a direct cause of a misunderstanding of how sticky inflation would be, along with a slow response to the data that showed inflation was growing aggressively.

My concern is that the Fed is going to make the same mistake again. If they don’t cut interest rates soon enough, they risk overshooting to the downside and causing a recession. No one should want a recession to occur.

So the Fed could wait a few more months before cutting interest rates, but they risk having to make extreme cuts very quickly if they are wrong. Instead, they should do a 0.25% interest rate cut today to start slowly pushing us back towards a lower interest rate.

Extreme reactions should be avoided. Looking forward, not backwards, should be the name of the game. The Fed got inflation down and we should give them their victory so they don’t repeat their mistakes of the past simply to pursue a reputation achievement.

I don’t think we get the rate cut, but at least I am on record now saying that we should.

Hope you all have a great day. I’ll talk to everyone tomorrow.

-Anthony Pompliano

Leif Abraham is the Co-Founder & CEO of Public.com. They are creating technology that makes building a multi-asset portfolio fast, secure, and frictionless.

In this conversation, we talk about the shift in investing trends, bitcoin ETF, technology vs financial advisors, giving revenue back to users, and operating the business.

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