Jerome Powell, speaking at a Dallas Fed event on Wednesday evening, stuck to the script.
Of course he’s the one writing that script, so I suppose that’s to be expected.
“Certainly all meetings are live now, there’s no question about it,” he
warned said, adding that “over time, folks will get used to the idea that we can and will move at any meeting,”
I’m not sure that’s accurate, Jay. If October taught us anything, it’s that markets aren’t particularly enamored with the idea that they aren’t being effectively consulted anymore on the appropriate course of monetary policy.
Time was, markets were in on things; they (markets) were effectively a co-author of the policy script. Powell’s data dependence amounts to a revocation of that license.
When you reinstitute the unconditional interpretation of the economic data (which is what strict “data-dependence” means), you revoke the market’s license to consult. The combination of ambiguous data and a two-way communication loop between the Fed and markets previously meant that policymakers and market participants were always on the same page.
Powell’s “Plain english” approach is the opposite of that. His “strategy” essentially involves stating the obvious (i.e., the U.S. economy is doing well) and then proceeding with policy tightening based on that. There is no room for the market in Powell’s “plain English” policy (unless a market correction brings about a desirable tightening in financial conditions). There are just the rules, the data that go into those rules and the implications of that naive approach for rate hikes.
For his part, JPMorgan’s Marko Kolanovic partially blames “miscalculations” from Powell’s Fed and the White House for the October rout. Here, for anyone who missed it, is the relevant excerpt from Marko’s November 7 note:
It was essentially a miscalculation and a conflict between the US Administration and Fed going into important midterm elections. Shortly before the sell-off, we wrote about Equity markets being very uneasy with the increasingly hawkish rhetoric from the Fed. At the same time, we pointed out that Trump may be miscalculating on trade and the US market was not pricing the negative EPS impact of a trade war. The reasons for the Fed ramping up hawkish rhetoric going into one of the most important midterm elections in US history will continue to be questioned by market practitioners. There was a global trade war scheduled to start, signs of stress from US housing to emerging markets, an ongoing crisis in the Eurozone (Italy), and finally the worst 1-month sell-off since Lehman (recall that historically rhetoric eased/turned dovish for much smaller reasons such as the last French elections). Going into the election, the US administration perhaps miscalculated that the NAFTA deal would be enough to prop up market sentiment, and that the Fed would provide dovish ‘cover’ for the trade war. In the context of rallying the Republican base on immigration and trade (rather than winning independents and moderates), trade rhetoric escalated going into election (e.g., the ‘Super Micro’ affair). A dovish Fed would have propped up markets and underwritten the trade war policy going into election, but the hawkish Fed ended up triggering the market crash. The catalysts for the October crash were miscalculations on both sides, and we hope lessons will be learned.
Somehow, I doubt Powell “learned” anything and I am absolutely certain that Trump didn’t, because all he did was blame the Fed.
In any event, Powell went on to say on Wednesday evening that he’s “very happy about the state of the economy”, something he has made abundantly clear on any number of occasions over the past several months. In a half-hearted effort to let everybody know that he is aware that the market believes he might be on the verge of tightening the economy into a slowdown (just as the effects of the trade war start to bite and the stimulus sugar high wears off), Powell said he’s “trying to avoid hiking too slowly or too fast” and “takes both risks seriously”, something he says is reflected in the “gradual” pace of hikes.
As for the balance sheet, he “doesn’t know” what the “equilibrium size” is quite yet, but what he does know is that it’s important to “return it to a smaller size”. He’s right, that is important. Because once he hikes the economy off a cliff, he’ll need to start expanding it again. I’m just kidding – sort of.
Powell is also pretty sure that the balance sheet normalization effort is going “very well” thus far, although as Bloomberg’s Cameron Crise quips, “I’m not sure I’d say it’s going ‘very well,’ given that the effective Fed funds rate has been rising within the range, forcing them to fiddle with IOER in June and likely in December.”
Mercifully, Powell acknowledged that financial market activity “matters” but emphasized that his Fed is “looking mainly at the real economy.”
So what’s Jay’s ultimate goal? Well, here’s his answer:
[It’s] to extend the expansion, to keep unemployment low and to keep inflation low.
On that first point, it’s hard to imagine how much further this can be “extended”.
As far as whether Powell is inclined to care what Donald Trump says or thinks, you can get a clue from the following soundbite:
We’re just trying to do our jobs, and we’re doing fine.
I know a certain Twitter personality who would disagree with the second half of that assessment.