Is the Fed serious about price stability?

Happy Thursday out there, Team 42. It's your skipper here, Darius Dell, to present our Macro Minute for Thursday, September 17th, 2026. Hope everyone's having a great week. So, as always, we'll start with the executive summary from today's lead-off morning note, so let's dive right in. Today's key macro question is, is the Fed serious about price stability? The short answer is, LOL, of course not. Yesterday's rate hike was merely the beginning of a transitory appeasement of bond vigilantes before a significant and surprising easing cycle that is likely to begin in 2027. The key supporting evidence of this view is the median FOMC member increased their 2026 to 2027 real GDP forecasts, lowered their 2026 to 2028 unemployment rate forecasts, and increased their 2026 and 2028 PC deflator forecasts, finally and explicitly acknowledging the booming paradigm C economy that we signaled to 42 macro members last April. Assuming the latest summary of economic projections has proven accurate, and accurate via the passage of time, and the Fed finally achieves its price stability mandate in 2029, this outcome would represent nine consecutive years, nearly a decade of the world's most important central bank missing its own inflation target to the upside. That is noteworthy in the context of this. The median FOMC member increased their 2026 to 2028 year-end Fed funds rate forecast and their estimate of the neutral rate, which is well below today's policy rate level, finally and explicitly acknowledging the need for the Fed to play action pass, i.e. tighten now, to set up the run, i.e. ease, structurally. So what does this mean for your portfolio? Interestingly, the median FOMC member is now expecting to pivot to the run game, i.e. easing structurally, in 2028. This projected dovish policy pivot is at odds with the market, which is currently pricing the floor Fed funds rate higher than the current level of the Fed funds rate. The 42 macro market implied Fed neutral rate model is currently signaling a neutral rate range of 4.25% to 4.65%. Both figures are above the current effective Fed funds rate range of 3.875%. Sorry, the current effective Fed funds rate of 3.875% after yesterday's hike and the latest median FOMC member's neutral rate estimate of 3.25%. So obviously much higher than what they're expecting. Thus, the Fed policy is still modestly accommodative according to the market. The market implied Fed R-star model is currently signaling an R-star range of 1.84% to 2.25%. Both figures are above the current real effective funds rate of 1.48%. The mean of 42 macros, five 10-year nominal treasury yield, fair value models is currently 5.99%. If the Fed does not take incremental action to truncate its still accommodative policy setting, the market will likely continue to sell treasury bonds until Besant via TGA-funded buybacks and officially Warsh via Bank-to-Regulation Reserve Management Purchases and or Yield Curve Control are forced to buy them. Today's recoveries in stocks, gold, and Bitcoin may be front-running this eventuality. So, as always, a wrap-up with a question from our community. This one's titled, Play Action Pass to Set Up the Run Analogy. It says, I've heard the reference, play action pass, set up the run, used multiple times by Darius to explain the Fed strategy. Football teams often attempt to establish a run game via frequency of attempts, accepting they may sacrifice short-term yardage gain in order to set up an explosive play action passing game later in the drive or in the game, which then forces the defense to honor that ability, creating more opportunities, space, and space in the run game. I'm trying to understand the analogy better and square it in my head. Which Fed actions correspond to running the ball versus play action pass in football? So, this is an analogy based on my football playing days. I was a two-time All-Ivy left tackle at Yale, had a cup of coffee with the Seattle Seahawks. Well, not a cup of coffee. They invited me to camp and I had already lost 50 pounds. So, that's neither here nor there. But getting it back into this. So, it's our belief that the Fed is only tightening now to essentially back off the linebackers and safeties in football. football terms, but in bond market speak, or they're backing off the bond vigilantes so that they can create the scope and the runway to eventually ease monetary policy in ways that they are going to be forced to ease in the context of containing this natural structural updrift in long-term bond yields. Again, our fair value model on a mean basis across those five models, yield curve, real rate, inflation expectations, term premium, and nominal GDP growth is basically 6%. And so a Federal Reserve, they ultimately need to, they can't get too tight with monetary policy. They can't do what they need to do to get 2% inflation because ultimately that will cause them to tighten the economy into a slowdown that will cause the budget deficit to expand both in terms of net interest, but also in terms of, you know, slowing tax receipts. And so ultimately they, you know, kind of stuck in a box here. And so, you know, they're not going to be able to do what they need to do on the tightening front to actually achieve their price stability mandate, which ultimately means they're going to eventually pivot back to dovish monetary policy to, you know, offset the geopolitically driven supply-demand imbalance in the treasury bond market that is contributing to. This 6% fair value level on the 10-year nominal treasury yield. So hopefully that analogy is helpful. You know, again, just kind of football speak for those who may be unfamiliar. You know, one of the reasons you, you know, you want to play action pass to set up the run. Most people think you want to run to set up the pass. That's kind of the, that's what high school football coaches do. What the folks like Kyle Shanahan and Sean McVay are doing in the NFL and what we were doing in college at Yale 20 something years ago, we're running Kyle Shanahan's dad's offense, you know, Mike Shanahan's offenses, John Elway and Terrell Davis back in the day. We were running their offense back in the day. And what we would do is we'd start the game, trying to launch the ball deep so that we can create the spit, keep the linebackers and the safeties backed up. And so when we really started to pound the rock later in the second half, you know, they were still reticent and they remember all those big, deep passing plays later in the game. And so they weren't flowing downhill. They weren't aligning closer and closer to the ball, which ultimately gives us linemen more time and space to stay on the double teams and move the down linemen for a longer period of time. And so, you know, this is next level thinking it's, it's second order, third order thinking, as opposed to what most people think when they think footballs, I got to run the ball, establish the run so I can set the pass up. No, that's it's football's too complicated. It's too hard at the NFL level in order to do that. So you got to think about being outside the box, like we're doing here with this thing, which beat all of global wall street and the federal reserve to understanding what they need to do in this, in this. So if you want to stay tuned, if you want to continue to figure out where this is all headed before the fed and wall street figure, that is out, uh, obviously join us. If not, uh, catch back here tomorrow. Cheers. Have a great day. This content is for informational purposes only, and does not constitute an offer or a solicitation reliance upon the information in this material is at the sole discretion of the viewer or listener investing involves risks. Any reference to a company issuer or investment strategy is for instructive purposes only, and does not constitute an offer or a solicitation. For full disclosures, visit 42 macro.com backslash disclaimer.