Submitted by Taps Coogan on the 9th of August 2019 to The Sounding Line.

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James Athey, senior investment strategist at Aberdeen Standard Investments, recently spoke with CNBC in a brief exchange that characterized the increasing circularity of Fed policy vis-a-vis the markets. Namely, the Fed is letting markets measure the effectiveness of its policy and markets are reflecting the trajectory of Fed policy.

Some excerpts from James Athey:

“The market sees that it can influence the Federal Reserve and it’s got a taste of something that it likes… The Fed ‘disappointed’ markets in July because, while it did ease policy, the communication was confusing. It seemed to suggest that there wasn’t really much more coming down the pipe. The problem is that just very quickly becomes self-defeating. When the Fed has outsourced the stance of it policy and the measure of its policy to financial markets, the circularity of it is quite obvious and clear. Financial conditions are a combination of different market based variables. So, if the Fed disappoints financial markets for whatever reason, and markets react adversely, than that tightens financial conditions and the Fed ultimately has to respond and that’s the game we are now playing.”

Indeed, that is the game we are now playing.

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