In an editorial regarding former President and current Republican Presidential candidate Donald Trump as “Central Banker”—The Wall Street Journal editors’ tongue-in-cheek term—those same editors noted this about the Federal Reserve’s economic models:

[T]he Fed staff’s models that are still rooted in the tradeoff between inflation and unemployment.

The editors are right about that being a mistake; although they don’t expand on that claim with their reasoning about why that’s a mistake.

My claim about why that’s a mistake is this. First, the Fed’s situation is rooted in its statutorily mandated requirement to maintain price stability and to maintain full employment. The view from Congressional and White House politicians, the Fed, and so many economists is that these are separate, if not mutually opposing (and so not so separate) requirements.

My view, then, is that the two requirements are closely related, but in sequence, not in opposition. Keeping prices reasonably stable—the Fed’s nominal inflation target of 2% per year works well enough—greatly facilitates a healthy, growing economy. That healthy, growing economy itself pushes toward full employment. The Fed’s strongest move toward its full employment mandate, then, is to satisfy its mandate of maintaining price stability and to take no overt action regarding employment.

Lots of folks—pundits who should know better—expend a lot of ink and pixels commenting on the stock market’s behavior and how that’s a powerful indicator of our underlying economy. I, on the other hand [ahem] have commented on the stock market’s firm tie to our underlying economy, but with a lot of slack in that connection: there is a lot of highly variable time lag between the private, real economy in which all of us must live and operate and the stock market in which investors (which includes far more of us than those same pundits seem to understand) operate, with the real economy, which drives the stock market, making its moves and the stock market, eventually, responding, or the stock market betting on an upcoming real economy move that may or may not happen within a useful timeframe, or at all.

Here’s an example of that essential temporal disconnect:

They [investors] built over months: big bets on the Japanese yen. Complex cryptocurrency wagers. Investments in hot tech companies.
Common to all the trades were heavy doses of leverage, or borrowed money, which investors used to amplify expected gains. As markets rose through the first half of 2024, the investments generated windfall profits, inspiring copycat traders to get on board and pushing prices higher.
Now the tide has turned. Unrest has returned to global markets over the past month, and investors are now in retreat from these once-unstoppable trades.

Very few of those moves had any direct connection with the underlying real economies as they were behaving in the moment or had been behaving for some time. They were moves in anticipation of those real economies’ future behavior.

My point here is not to stay out of the stock market altogether and forever. It is, contra the above, always a good time to invest in the American stock market. Just don’t constantly chase the latest hot tip or gee whiz fad. Don’t assume, either, that what the real economy does will be promptly reflected in the stock market or vice versa. The former likely will occur, but only eventually; the latter is a crap shoot on the house’s table.

Instead, have clearly defined—and written down, so memories can’t fade or impressions can’t distort memories—goals and a clearly defined—and written down, so memories can’t fade or impressions can’t distort memories—plan for getting there.

Do the research necessary to understand investing and investment plans and development, do the necessary research into the companies under consideration for investment and/or into the stock selection algorithms you intend to use, and then stick to your plan. That plan, too, cannot be impossible to change, but it should be very difficult to change.

Yes, it takes work. But that’s the nature of success in any endeavor.