Powell can surprise you on Wednesday by admitting that "Dry the Bathtub" Too Much – The End of QT and the Return of the Real Debate in the Fed

[Igor Pereira]

The FOMC meeting of Wednesday carries a weight that goes far beyond the pricing of a symbolic cut in interest rate. The real question that hangs over the institutional operating tables is whether Jerome Powell is about to make a tacit confession of error.

By Igor Pereira, Financial Market Analyst, Junior Member WallStreet NYSE

There is an increasing likelihood that the president of the Fed will be forced to admit that the central bank overdrained the financial system and that he now has no choice but to start "refilling the tub". The focus is not only on the price of money (interest), but on the amount of it (liquidity).

The Technical Maneuver to Disguise EQ

The central discussion revolves around the need for the Fed to implement a permanent schedule of "book management" operations focused on buying short-term securities (bills). New York Fed officials have telegraphed this concern, warning about the fragility of the financing markets and the inadequacy of bank reserves. By Powell's own framework, Quantitative Tightening (QT) is effectively dead.

The reserves are sweeping the bottom of the track considered "wide", flirting dangerously with scarcity. Any announcement of securities purchase will undoubtedly be dressed as a mere "technical adjustment" to avoid panic, but sophisticated analysts will know the truth: it is a reconstruction of reserves necessary to mend the financing stress that the Fed's own excessive tightening triggered.

The Fallacy of Inflation and the Neutral Level

While the Fed cares about liquidity behind the scenes, the public justification for caution – inflation – is disintegrating under scrutiny. The PCE index (excluding housing) is already at the level of 2%. If we insert market measures for real-time rent and housing, inflation is actually below 2%.

The narrative of "tariff inflation" that the Fed and Wall Street repeat is not based on basic economic theory; tariffs are relative price adjustments, not continuous monetary inflation. The Fed should be at the neutral rate (r*) right now. The insistence on a restrictive stance based on outdated data is what is causing the fracture in the banking system that now requires the injection of liquidity.

The Keynesian Monoculture Break: A Change of Regime

Perhaps the deeper development, but less discussed, is the tectonic change in the intellectual culture of the Federal Reserve. We are witnessing the end of a long experience of progressive-keynesian orthodoxy and the rebirth of intellectual pluralism. For a generation of investors accustomed to sanitized unanimity and manufactured consensus, the return of real debate and dissent seems radical and dangerous.

However, these cracks in monoculture are signs of health, not disease.

For insiders, genuine dissent in the Fed is not a communication failure; it is a regime change. The system that suppressed alternative views and rewarded group thinking is being forced to confront the costs of its own arrogance, from the wrong reading of transient inflation to blind trust in flawed models.

The Fed is finally admitting that a single ideological framework cannot permanently manage a complex and dynamic economy. For markets, this means that the era of artificial predictability is over; the era of price discovery and real volatility is back.

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