How to Pretend You're Cutting Rates While Cutting Nothing

It's fascinating, in the way a slow-motion train wreck is fascinating, to watch the Federal Reserve play 4D chess with itself while claiming the board is empty.

Start here: Stephen Miran and Christopher Waller dissented from the January rate decision, preferring a 25 basis point cut. Not a radical position. Not even hawkish by historical standards. And yet in the very same meeting, the Committee held firm at 3.5%-3.75%, with the Chair—Jerome Powell, whose term expires in May—explicitly noting they'd "carefully assess incoming data." Carefully. As in: maybe do something, maybe don't. Probably won't.

What we're witnessing isn't monetary policy. It's institutional paralysis dressed up in data-dependent language.

Vice Chair Jefferson says conditions in the labor market appear to be stabilizing and the economy is well-positioned for growth while inflation returns to our 2 percent objective. That sentence is the verbal equivalent of a hedge fund that's hedged everything so thoroughly that it has no actual position. The labor market is "stabilizing"—which means it's neither strong nor weak, just sort of existing in economic purgatory. And inflation will return to 2 percent, but only if we squint really hard at the parts of inflation that don't exist yet.

Here's what nobody's saying out loud but everyone knows: core goods prices are up 1.4% year-over-year, and it's not because of supply constraints or demand surges. It's partly reflecting increased tariffs filtering through to certain goods prices. Certain goods. Specific goods. The goods that everyone buys, but we'll call them "certain" so it feels more technical.

The real inflation nightmare—and they know this—hasn't arrived yet. We're still in what you might call the aperitif phase. By mid-2026, the delayed pass-through of tariffs should be substantially complete. This could add 50 basis points to headline inflation by mid-year. Fifty basis points. In six months. From a policy that was already implemented. Not from something that might happen. From something that will happen, because it's just price mechanics playing out over time.

And what does the Fed say about this? They're "prepared to adjust policy." Which means they're not adjusting policy, but they want you to know they theoretically could. It's the economic equivalent of saying you're prepared to work out while never actually going to the gym.

Meanwhile, earnings are happening. 79% of S&P 500 companies that have reported are beating expectations, with Q4 earnings growth estimated at 13%. But look closer and the bifurcation is violent. Estee Lauder beat earnings estimates but slumped 10% on tariff concerns. E.l.f. Beauty soared 14% after lifting 2026 guidance. Monday.com tanked 14% despite beating earnings because guidance disappointed. The market isn't parsing earnings. It's parsing the credibility of forward guidance, and it's finding companies guilty.

Because here's the thing they won't say in an earnings call: if tariff pass-through is coming, and it's going to hit in the spring, and companies have already told you they're investing $630 billion in AI infrastructure while simultaneously dealing with margin compression from tariff costs, then the earnings growth we're celebrating now is borrowed from the future. It's the revenue equivalent of maxing out a credit card for a vacation and calling it profit.

Michelle Bowman said at the last FOMC meeting that the labor market is fragile, and that fragility poses the greater risk. Not inflation. Labor market fragility. Which is code for: we're one bad jobs report away from capitulating on rates, and we all know it. But we're going to sit here and hold firm until the data forces our hand, because doing anything proactive would be admitting we don't know what we're doing.

They don't know what they're doing.

The Fed inherited an inflation problem in 2021 and solved half of it by making money expensive. The other half—the tariff-driven goods inflation + the AI-driven capex spending + the looser financial conditions that the Fed doesn't actually control anymore—that half is still cooking. It's been cooking since October. And in six months, when it arrives on plates across the consumer economy, they'll tell you they're "encouraged by progress" while cutting rates and praying nothing breaks.

The consensus view among forecasters is that inflation will continue its gradual descent toward 2 percent through 2026. But the risk is that inflation surprises to the upside—potentially exceeding 4 percent by the end of 2026. The consensus view. The consensus view is always the view that requires no difficult decisions until the day it doesn't work anymore.

The stock market doesn't care. The Dow made new records. Tech rebounded. Oracle is up 19% in two sessions. The game is still working, the music is still playing, and everyone's still dancing because nobody wants to be the first person to suggest the bar tab is unpayable.

By March, when the jobs data comes in weaker and the CPI prints hotter than expected, the Fed's careful data-dependent assessment will suddenly find a lot of encouraging signals in the lower employment numbers. They'll cut 25 basis points and call it prudent. The market will rally because rate cuts always feel good in the moment. And we'll all collectively pretend we didn't know what was coming.

We knew.