Obviously, my bias was to write about the Situational Awareness / Leopold Aschenbrenner debacle. But alas, I write on Sundays and my friend James Wang wrote on Friday. His post on the topic is a must-read.

Luckily for this author, there was a Fed meeting this week. And it was a doozy.

To understand why it was a doozy, it’s first necessary to establish some context:

1. There is no such thing as a “free” market. Every government intervenes in their domestic markets, it’s only a question of degree and frequency. Having a good mental model of how much the government is likely to meddle is critical.

2. Pre-GFC, the Fed was much better about staying in their lane and letting markets set their own prices.

3. Post-GFC, the meddling got dialed up to 11. This was particularly true in the bond market, where they systematically and deliberately held yields down. This juiced asset returns and ultimately fueled inflation.

4. It was understood by market participants for the last 20 years that the scope of interventions included a “Fed Put.” If the stock market fell too much or the bond yield rose too much, they would whip out their printing presses and rain money on the system until the “market price” was what they wanted it to be.

In his presser this week, Warsh implied multiple times that he wanted to go back in time. To a simpler time, where the market set prices and the Fed managed short-term interest rates. Now, one press conference is not enough to immediately forget two decades of policy behavior. But our eyebrows are raised. If you flip to that mental model of meddling, it completely changes the risk/reward of all global assets, and in many cases would have you do the opposite of what you would do under Powell and the like!

The aftermath of the meeting was a lot of criticism of Warsh for not tightening. Thought experiment: in a world where interest rate sensitive borrowing is weak and strong spending is being funded by the performance of long-duration assets (read: equities), how do you tighten? The short-term rate is pretty irrelevant, what matters is the bond yield…which did in fact rise. We needed a tightening and Warsh did it - he tightened by not tightening! And now we wait and watch. We watch to see if he did it on purpose, if he’s serious about freeing our markets from the grip of the Fed, and if it is in fact time to dust off the old pre-GFC playbook.