Listen to the full episode, here.
John Norris (00:30):
Well, hello again, everybody. This is John Norris with Trading Perspectives. As always, we have our good friend, Sam Clement. Sam, say hello.
Sam Clement (00:36):
Hey, John. How are you doing?
John Norris (00:37):
Sam, I’m doing very well today. I hope you are.
Sam Clement (00:39):
I’m doing great. I can’t complain.
John Norris (00:40):
Glad to hear that—because a lot of people might have complaints today. It’s the afternoon of March 19th, and earlier today, the Federal Reserve announced that it did not cut the overnight lending target rate.
Sam Clement (00:55):
Exhilarating.
John Norris (00:56):
Exhilarating, indeed. No one really expected the Fed to cut rates, but gee whiz, it sure would’ve been nice. Cheaper capital flowing into the U.S. economy and financial system might have been just the shot in the arm we needed. But we didn’t get that. Instead, the Fed announced it would reduce quantitative tightening to $5 billion per month—which essentially means they’ve stopped it.
Sam Clement (01:21):
Well, I think you have people on both sides of this. And by both sides, I mean that some say we still need to hike rates because inflation isn’t fully under control, while others argue we should have cut rates yesterday. Frankly, I think both sides have valid points. You can make a strong case for any of these approaches—or for doing nothing at all right now. It really depends on what’s most important to you.
John Norris (01:54):
Well, there’s a term that describes what the Fed seems to be hinting at today—when you have lower growth rates but still high inflation.
Sam Clement (02:04):
That’s stagflation.
John Norris (02:07):
Exactly. And that’s not a word anyone wants to hear. You and I have discussed how difficult it must be to be a voting member of the Fed. They’re working with imperfect data, yet people expect them to have some special insight or a crystal ball that allows them to predict the future. But they don’t.
Sam Clement (02:51):
These are experts in their field, but they aren’t working with proprietary data that no one else has. Economics is a social science—it’s based on theory, not absolute fact. You can’t truly test most economic models. So, at the end of the day, it’s a guessing game. The Fed constantly projects where rates will be, yet even they get it wrong. If the people setting the rate can’t predict where it’s going, who can?
John Norris (03:38):
When you put it that way…
Sam Clement (03:41):
It’s impossible to predict. That’s why I say it’s a tough job. There are always unintended consequences to every decision, and social sciences are inherently difficult.
John Norris (03:57):
It is kind of comical, though, to hear the Fed say, “We predict two rate cuts this year”—when they’re the ones deciding to cut the rates! And yet, they could be wrong about their own decision. The latest dot plot suggests they’ve revised down their expectations for GDP growth in 2025, from 2.1% to 1.7%. Unemployment is expected to tick up to 4.4%, while the overnight lending target is projected to go down to 4%—with an effective rate of about 3.875%.
But, at the end of the day, it just feels like they’re throwing spitballs at the wall. Powell’s comments were taken as dovish, but at the same time, he essentially admitted, “We don’t really know what’s going on either.”
Sam Clement (05:24):
So… who’s driving things?
John Norris (05:28):
I guess you would have to say the markets are. Not just the stock market, but the broader economy. People are worried about tariffs, about DOGE, about all these external factors. That’s what Powell meant by soft data—things like sentiment surveys showing uncertainty, even while hard data (like actual spending) remains strong. Eventually, though, perception becomes reality, and then the Fed has to act.
Sam Clement (06:14):
And part of the challenge is the growing divide between the haves and have-nots. When you look at broad economic data, it may look fine—but when you break it down, it’s clear that some people are doing phenomenally well, while others are struggling. That skews the Fed’s understanding of what’s actually happening.
John Norris (07:13):
Exactly. Back in Alan Greenspan’s time, it was a one-man show. We all called him “the Maestro.” But it turns out he wasn’t any better than anyone else—he just happened to be Fed Chair during a unique demographic shift when Baby Boomers were at their peak earnings years. Now, with a more consensus-driven Fed, we at least get multiple perspectives at the table.
Sam Clement (08:25):
Which is important, given they’re working with imperfect data and they’re not perfect people.
John Norris (09:42):
Exactly. The data is so unreliable that even if I were Jay Powell, I’d be saying, “I guess it looks okay?” But I’d want a lot more clarity before making big moves. If the Fed doesn’t feel confident in its forecast, how can it justify major changes to monetary policy?
Sam Clement (10:43):
And that raises the big question: Should we even have a Federal Reserve?
John Norris (11:01):
People have been asking that for years. The Fed artificially sets interest rates based on flawed data and incomplete knowledge. And historically, that has led to economic bubbles ever since they’ve been doing it.
Sam Clement (11:08):
But to be fair, I do think it has helped lessen the severity of recessions.
John Norris (11:14):
Well, that’s right. When you reduce risk, you reduce the potential for return. So, if the markets were calling the shots here—who knows? Anything goes. We could be under a lot more risk. And with more risk, you have the potential for more return.
Sam Clement (11:25):
It goes back to even the Treasury markets and having trillions of dollars on your balance sheet that you’re holding—and the impact that has on interest rates. Like, hey, what if we fully let the market decide? Where do you think Treasuries would go? What about the fact that they hold mortgage-backed securities? To me, it’s crazy that they’re choosing which asset classes are more…
John Norris (11:48):
Important. If there were no Federal Reserve, and no $9 trillion balance sheet—or whatever it is now; it’s not that high anymore—if we didn’t have that type of intervention, interest rates would be significantly higher than they are right now.
Sam Clement (12:03):
Well, I think it’s hard to argue with that. It’s just supply and demand. If you evaporated $7 trillion of demand, it’s hard to say how much higher rates would go. Because as they start to get higher, maybe other countries and firms would be more—
John Norris (12:19):
Less likely? Well, if they got that much higher, perhaps we wouldn’t borrow as much.
Sam Clement (12:23):
Exactly. Look, it’s all unknowns. It goes back to the difficulty of economic forecasting.
John Norris (12:30):
I’m sitting here looking at the Federal Reserve today. No one was anticipating them doing much of anything, and they didn’t do much of anything—at least in terms of interest rates. However, they did say they’re going to slow quantitative tightening down to, what, $5 billion a month? That’s essentially chicken feed. The next step from that is quantitative easing again.
Sam Clement (12:51):
You have to slow down before you go the other way.
John Norris (12:54):
And I think that’s actually the more realistic scenario right now. Over the next—let’s say three-plus months—into the second quarter, I think it’s more likely that the Fed will continue to tinker with quantitative tightening and the balance sheet rather than make any changes to the overnight rate.
Sam Clement (13:23):
That’s probably fair. You still have people on the board who are comfortable letting more play out. Again, they’re working with imperfect data, and we’re not getting a super clear direction on things. We’ve talked about some of the labor market data and the cracks forming there, but it’s not like everything is fully falling apart to the point where they have to make a big move right now. So, with that, doing things in what I’d call the background may make a little more sense.
John Norris (13:56):
That might not make the same kind of headlines, though.
Sam Clement (14:00):
Well, and it doesn’t impact borrowers as directly as moving the Fed funds rate does.
John Norris (14:07):
So that’s what I think is likely to happen. And I’ll tell you this—if I were a voting member of the FOMC, looking at the data, I think inertia is a powerful force. I can look at the numbers and go, okay, the unemployment rate is 4.1%, the last CPI reading was a little better than anticipated, but we’re still running at 2.8% on a 12-month basis. That doesn’t really suggest the need to cut.
However, retail sales for January were horrible. The trade deficit was horrible. We’re probably going to have a negative sign in front of first-quarter GDP for a variety of reasons. Sentiment gauges are falling. And then we have a lot of jobs—a lot of jobs—being cut with Doge and the freezing of federal workers. Let’s face it, I think the federal government added around 1 million jobs over the 24 months ending in January 2025. If you take that out of the equation, all of a sudden, you start thinking, “I don’t really know what the future looks like, so I’m just not going to do a darn thing.”
Sam Clement (15:17):
Well, part of the trouble to me is the timing of all this. It’s kind of similar to the timing of slowing our deficit spending. Yeah, we should really be slowing it down when things are going great. But if they’re starting to see cracks, it doesn’t feel like the best time to say, “Hey, let’s really clamp down on spending right now.” That’s when you should be saying, “Let’s put a little more money into the markets.”
It’s the same with quantitative easing and tightening. The goal should be to not have this large of a balance sheet, right? In theory, they shouldn’t be holding $7 trillion—or previously $9 trillion—of assets. But when you start to see weakness, it feels like everyone has gotten used to this high in the markets over the past 15 years, where things just go up and to the right. And when they don’t, we find a way to support them and make them go back up again. That has led us to a point where, when you start to have weakness, we haven’t really clawed our way out of it the first time—we’ve just made things worse.
So, is now a great time to be continuing to tamp down or tighten the balance sheet? Clearly, the Fed is saying no, based on the fact that they’re slowing it down.
John Norris (16:27):
Well, I think you’re right on a lot of things. What you’re touching on is this idea that everything has to go up and to the right. And if it doesn’t, everyone freaks out.
Sam Clement (16:47):
Yeah. And historically, the pain tolerance has been very low.
John Norris (16:51):
No doubt about it. First, we had the Greenspan Put—Greenspan was going to do whatever he could to make sure things went up and to the right.
Sam Clement (16:47):
Yeah.
John Norris (16:51):
Then we had the Bernanke Put. Then we had the Powell Put. Now, people are talking about a Trump Put. But apparently, there isn’t a Trump Put. Everyone anticipates some kind of intervention from the powers that be to keep them from experiencing any sort of discomfort.
Sam Clement (17:10):
In my opinion—and we’ve talked about this—
John Norris (17:12):
The more we do that, the worse the discomfort is going to be when it finally hits.
Sam Clement (17:12):
That’s the dilemma. And honestly, right now, I don’t think there is a “put” in place. Powell seems willing to let markets weaken, and Trump is framing the first half of the year as Biden’s economy—which means he has no incentive to prop it up. Even Treasury Secretary Janet Yellen said recently that it’s not normal for markets to always go up.
John Norris (18:06):
At Oakworth, we’ve been discussing how this is the first time in a long time that we’ve had a normal economic slowdown—with both tighter monetary and fiscal policy. That’s what DOGE is—tighter fiscal policy, cutting waste, reducing government jobs, and shrinking the deficit.
John Norris (24:04):
So, how good is the Fed really at forecasting the future and the economy? And if you say “really good,” then where are they getting their data? And if you say “really bad,” what is the purpose of the Federal Reserve?
Sam Clement (24:10):
Well, I think they’re pretty bad at it. But I also think there’s a purpose to it, and there are some good charts that illustrate this. The Fed can slowly reduce how often we experience recessions and decrease their severity—particularly when it comes to massive drawdowns, bank runs, and financial panics.
I think it has helped smooth things out. And sure, you could point to the 1930s, you could point to 2008, and say, “Well, the Fed didn’t prevent those crises.” But…
John Norris (24:30):
We had a Federal Reserve during the 1930s.
Sam Clement (24:31):
I know—that’s exactly my point. There are flaws in the system. But if you compare what happened before the Fed existed to the severity of recessions and bank runs after it was established, I think overall, there are benefits. It has helped stabilize things compared to having no central bank at all.
So, I think the real value of the Fed isn’t just in interest rate policy—which only does so much. It’s more about its ability to step in and support the economy when things are contracting. That’s where I see its biggest role.
John Norris (25:30):
Not very good. Which makes you wonder—should the Fed’s rate policy be formulaic instead of based on guesswork? Maybe something like trailing 12-month inflation + 1.25%?
Sam Clement (25:39):
There’d be benefits to that, but also drawbacks. In a crisis, the Fed’s ability to intervene flexibly is valuable.
John Norris (26:26):
Fair point. Well, thanks for listening! We always love to hear from you! If you have any comments or questions, please, by all means, let us know. You can always drop us a line at , or leave us a review on the podcast platform of your choice.
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Alright, with that being said—Sam, I’ll give you one last chance to talk about the Federal Reserve and just how silly they were today.
Sam Clement (27:22):
That’s all I’ve got.
John Norris (27:23):
Me too. Y’all take care.
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