Reading the markets: the Fed watch and how new ideas emerge

By: Michael W Arone, CFA, Chief Investment Strategist

This business requires all of us to read a lot. Like you, I appreciate the rigor of solid research, the suspense of a good plot unfolding, and the beauty of a perfect sentence. In this series called Reading the Markets, I’m excited to share my thoughts on some of the interesting ideas I discover.

No matter how clearly Chairman Powell signals the Federal Reserve’s (Fed) plans to bring inflation back to target, investors continue to obsess about how soon and how many times the Fed will cut rates this year. In fact, investors have been so preoccupied with Fed policy that they missed the economy sticking the soft landing.

Investors’ monetary policy obsession and big miss wouldn’t surprise Matt Ridley, author of The Evolution of Everything: How New Ideas Emerge. In his view, our focus on major events, such as a policy change by the Fed or the results of an election, contributes to the mistaken belief that change comes from the top down. Instead, he argues that change most often occurs “from the bottom up — when nobody is in charge.”

In The Evolution of Everything Ridley writes, if there’s “one huge mistake we all make, one blind spot,” it’s that we “assume the world is much more of a planned place than it is” where we mistakenly “credit the bystander with causing the event. A battle is won, so a general must have won it (not the malaria epidemic that debilitated the enemy army); a child learns, so a teacher must have taught her (not the books, peers and curiosity that the teacher helped her find).”

So, while a change in interest rates can impact the market, when seen through Ridley’s lens, the Fed’s policy decisions might be less consequential than the millions of decisions made each day by individual consumers.

In chapters that range from culture and technology to education and the economy, he urges readers to “see past the illusion of design, to see the emergent, unplanned, inexorable and beautiful process of change that lies underneath.”

Ridley’s explanation of Adam’s Smith’s belief that specialization and exchange drive economic prosperity clearly positions change as organic, not planned:

  • The natural exchange of goods and services leads to a division of labor in which people specialize in what they’re good at doing.
  • Gains result because everybody is doing what they’re most productive at.
  • The resulting greater specialization intensifies the move away from self-sufficiency, leading to the production of fewer things but increased consumption.
  • Specialization inevitably sparks innovation, another collaborative process driven by the exchange of ideas.

Ridley concludes that the more we trade, divide labor, and work for each other, the higher everyone’s standard of living becomes. All thanks to the “free market,” which he defines as a system of cooperation and innovation with limited government intervention and without “selfish individualism.”

Letting go of the idea that change originates at the top from institutions and individuals frees us to appreciate the power of spontaneous, organic change driven from below.

So, the next time you wonder when the Fed will cut rates or who will win the US presidential election, think too about all the smaller things — things you may be overlooking that could quietly add up to something big.

This post first appeared on June 26th 2024, SSGA Blog




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