Fed Watch: Roger Ferguson
Critical interview with the former FED Vice Chair details the likely path of FED communication and thinking this week and beyond.
Discussion
I wrote this morning that the conclusion from the Timiraos FOMC preview piece in today’s WSJ was Powell is likely to be neutral at tomorrow’s press conference, balancing maintenance of the resolve to bring inflation down to 2% with data dependence that allows the Fed to engineer their coveted soft landing. I said on Twitter following the post that I would wait to hear from former FED Vice Chair Roger Ferguson and former FRB New York President Bill Dudley before finalizing my pre-FOMC thoughts, and this morning we got Ferguson’s thoughts on CNBC. Ferguson’s commentary was surprisingly detailed and stark, and I’m not sure we’ll even hear from Dudley, so I’ve heard enough to provide my final thoughts (which I’ll do in more detail later - this Fed Watch piece is specifically dedicated to Ferguson). In simple summary, I believe Powell will lean hawkish but also openly hold out hope the Fed can engineer a soft landing. From an equity market perspective I don’t believe Powell can do enough to impart excess downside, but were he to come out with soft landing guns blazing SPX would absolutely rip - that I do not believe is on the table based on what I’ve observed from a communication and rates perspective.
My notes from the Ferguson interview are as follows:
The Fed is very data dependent at this point
Discussion: No surprise there, as that was Waller’s principal message before blackout)
Continued economic strength gives the Fed room to hike at least once more after July if the data call for it
Discussion: This will forever be such a bizarre concept to me. Rate hikes by definition harm the economy, and the stronger the economy remains the more harm the Fed must do to the economy to bring down inflation. Economic strength is NOT a good thing, as Ferguson alludes to in the interview. By definition, the stronger the economy is the more it will ultimately contract. Bizarre.
The Fed was pleased with the latest CPI report, but the war on inflation is far from over
Inflation may end up “stuck a little above 2%,” forcing them to hike two more times after July if that’s what the data call for
Discussion: This was a very, very sneaky-albeit-important message. There’s this broad market thought that once inflation is on its way back to 2% that the Fed can start cutting rates in order to maintain a still-restrictive but not overly restrictive “real” Fed Funds Rate. Ferguson’s message is very hawkish, especially given the following point…
Expectation of rate cuts in 2024 is not in their mind
Message from Powell will be that the next two meetings (September and November) are live
And the bottom line on rate cuts over the duration of 2023: Too early to say only once more, and certainly too early to say two more
Discussion: The bottom line for me from this Ferguson interview is that the Fed generally, and Powell specifically, are not going to “go for” the soft landing to the aggressive degree it appeared leading up to and in the wake of the CPI report two weeks ago
The most interesting, and likely the most important part of the interview was on broader financial conditions:
“I think they also care in general about this thing that we call ‘financial conditions’. And the fact that the equity markets are rallying - which is good in many ways - obviously creates a wealth effect that drives the economy forward, that gives them room to continue to raise rates if necessary.
“I do not think they want to crunch the equity markets, out of some vendetta - that obviously is not the way they are thinking about things. They’re focused on inflation, and the strength in equities tells them maybe there’s more to do in terms of bringing supply and demand into better alignment.”
Again, bizarre. Very bizarre thinking. Rallying equities creates a wealth effect that offsets the Fed’s tightening program, forcing them to hike even more and thus harm the economy in the long run even more than otherwise necessary.
But whatever. This thought process not only cements the prospect of a hard landing, it raises the risk of a crash landing.