Discussion
Earlier this week I posited that Bostic’s hawkish guidance foreshadowed a hawkish Powell in front of Congress. How wrong I was: Powell appears determined to cut.
The key quote from Powell’s Congressional appearances was (paraphrasing): “We will use our tools to keep the economy growing, employment full, and inflation falling back to target.” He also made it a point to say that the Fed needs to see “just a bit” more data to be confident enough to begin dialing back currently restrictive monetary policy.
The bottom line: Until realized inflation data start rising at a pace of at least 25 bps per month (3% annualized) - a level that, in my opinion, would prompt the Fed to start raising rates again - the Fed is going to exclusively focus on inflation when setting interest rate policy and use low-ish realized inflation readings to justify dialing back policy restriction. In other words, the “highly confident” formula detailed by former FRB NY President Bill Dudley in July 2022 and rubber stamped by Powell at Jackson Hole 2022, appears to no longer be the Fed’s focus - that formula being (per Dudley July 2022):
…officials will be hesitant to stop tightening until they’re highly confident (probability greater than 80%) that they’ve done enough — that the labor market has sufficient slack to keep inflation low and stable, and that easing financial conditions won’t lead to an inflation rebound.
The US federal government is currently running a fiscal deficit of 5-10% of GDP, and per Bostic commentary discussed above economic participants are waiting for the first FED rate cut to start hiring and investing again. This is the Structural Inflation Powder Keg that current monetary policy is barely holding at bay…yet Powell appears determined to cut.
I don’t buy the argument Powell is playing politics. He knows if Trump wins that his close confidante Governor Waller is likely next in line and will carry on his hawkish policy stance. I think he is enamored with current inflation data and has a god complex about the Fed’s ability to manage the US economy in a finely tuned manner.
The problem is, in reporting to Congress this week that the Fed is on a glide path to cuts later this year if the data come in as the FOMC expects, he served the Fed up to the Biden administration on a silver platter for a proper beclowning of its independence.
The Beclowning
First, it was reported this week that Lael Brainard stepped in to adjust interest rate projections in the October 2023 budget formulation, highly intentional signaling of who is in charge of rate policy.
Second, hot off the press this evening, President Biden opined about “that little outfit that sets interest rates.”
“That little outfit.”
With a 5-10% of GDP fiscal deficit in place why Powell is playing into this is beyond me. We all know inflation is set to explode higher in the back half of 2024 and into 2025 if the Fed continues to allow financial conditions to ease in this manner (just look at the corporate debt issuance bonanza that’s occurred YTD).
But it is what it is.
I can write all day long that I continue to believe that realized inflation data will force the Fed to resume hiking at the December 2024 FOMC meeting, but right here and now the fact of the matter is the market-wide perception is that the Biden administration has Powell by the b@!!s and that’s how the market is going to trade until forced to reconsider by hard data evidence.