That’s not to say there’s something inherently desirable about having PhDs running the show and it’s certainly not to suggest that economics is a “hard†science (it’s not, and I should know). But it is to say that economists have been running this show for a long time now and I’m not sure you want a non-economist in the driver’s seat when you’re trying to mark a smooth transition away from a $15 trillion global experiment conducted and overseen by economists. Maybe unwind that first and then bring in someone like Powell. Don’t just hand him the keys to a laboratory full of mutant guinea pigs (markets) and expect him to know how to interact with them once he gets in there.
That’s from our June Fed meeting post-mortem which carried the headline “Plain English”, a reference to Jerome Powell’s ill-advised swipe at the “old†(read: academic) style of monetary policy communication.
You might recall that at the June meeting, Powell kicked off his presser by saying he was going to deliver a “plain English summary†of where things stand. That, we warned, would backfire spectacularly at some point.
We also said this in June about the dangers inherent in Powell’s stubborn characterizations of balance sheet rundown as proceeding “smoothly”:
Apparently he’s not inclined to heed the warnings of the RBI’s Urjit Patel when it comes to balance sheet rundown which, according to Powell, is “proceeding smoothly†and will continue apace barring something absolutely crazy.
Ol’ Urjit is out of a job now, having resigned earlier this month, but Powell is still employed – at least until tomorrow morning, when Donald Trump will surely take to Twitter to explain how he might need to replace his Fed chair for the high crime of sticking to the dual mandate.
We’re highly sympathetic to Powell’s plight, but we’re not at all sympathetic to the notion that his “plain English” approach is going to work. Our concerns (as expressed in June) were validated in October when “plain English” translated into “long way from neutral”, catalyzing a “plain” disaster.
And speaking of disasters: Powell’s post-meeting press conference on Wednesday.
The problem with Powell’s “plain English” approach has always been that applying “plain English” to an imprecise “science” (economics) is an inherently risk proposition. It’s impossible to speak in precise (i.e., “plain”) terms about something that by its very nature isn’t precise. It also makes it difficult for market participants to interpret “data dependence” as “dovish” because implicit in the reaction function is the idea that it is the Fed’s sole discretionary right to decide what the data means.
When you reinstitute the unconditional interpretation of the economic data (which is what strict “data-dependence†means), you revoke the market’s license to co-author the script. The combination of ambiguous data and a two-way communication loop between the Fed and markets meant that policymakers and market participants were always on the same page. Hence: Total transparency.
Powell’s “Plain english†is the opposite of that. He has taken an approach which 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. There are just the rules, the data that go into those rules and the implications of that naive approach for rate hikes.
The only way out of that is if the data rolls over, at which point “data dependence” can be dovish. That’s what everyone thought the November Fed minutes tipped – that data dependence would be emphasized going forward to convey a flexible approach to incoming data that was clearly softening. Instead, the December statement continued to describe the economy in glowing terms (certainly relative to the tweaks some were hoping for) and Powell generally reiterated that in the press conference.
Read more
Fed Hikes, Defying Markets, Trump As Dot Plot Shifts, 2019 Growth Projected Lower
It got worse (for stocks anyway) when Powell started talking about the balance sheet runoff, which he (for the thousandth time) described as going “smoothly”. That ignores Urjit Patel’s warning (and the warnings of many other market participants) that failing to calibrate balance sheet rundown to take account of increased Treasury supply (necessitated by the tax cuts and stimulus) means sapping dollar liquidity (as markets are forced to absorb more and more supply), which in turn turbocharges the tightening that would already be going on via rate hikes.
Further, Powell went out of his way to reiterate that the stock market would not be the deciding factor in any prospective dovish relent. “Volatility probably doesn’t leave a mark on the economy”, he said, adding that “we follow markets really carefully [but] no one market is the predominate indicator.” By “one market” he means stocks, which careened “plainly” lower during his presser.
Ultimately, U.S. equities closed at a 15-month nadir, an outcome that likely prompted Donald Trump to choke on a KFC biscuit.
(Bloomberg)
The dollar surged.
(Bloomberg)
10Y yields dove 6bps to their lowest since April.
(Bloomberg)
The curve obviously bull flattened.
(Bloomberg)
It looks like the market is reading this as a policy mistake. Oh, and have a look at this:
(Bloomberg)
In case it wasn’t clear enough by the rate hike and the statement, Powell proceeded to make it crystal that no political considerations are going to influence the Fed. That’s most assuredly a good thing, but the manner in which he communicated it was characteristically ham-handed. Here’s some more “plain English” for you:
We’re always going to be focused on the tools that Congress has given us. Nothing will deter us from doing what we think is the right thing to do.
That sentiment is duly noted (and dually mandated), but the tone is “plainly” (and needlessly) obstinate, especially considering the fact that Donald Trump is hardly the only one who thinks that what Powell is doing is in fact not the “right thing to do.”
Powell went on to remind everybody that the Fed now “has the ability to move at 8 meetings per year” and that comes courtesy of his (also ill-advised) decision to deliver his “plain English” after every, single meeting. If today was any indication, that’s going to mean you can get rich simply by loading up on Powell puts on Fed days (not those kind of “Powell puts” – I mean literal puts to protect against Powell).
The presser wasn’t all hawkish, though. Powell also said the Fed “hasn’t declared victory on inflation yet” and, after noting that “inflation has come in just a touch below where we expected it to be”, he said that gives him some room “to be patient.”
Oh, and he also noted that at various points next year, it’s likely that your definition of “accommodative”, “neutral” and/or “restrictive” will differ from the Fed’s and by “your” I mean “Trump” and by “Fed’s” I mean “Powell’s”.
Ultimately, the market didn’t get a whole lot from the Fed today to suggest that Powell’s reaction function has changed.
“The Fed is basically retaining its tightening monetary stance”, SocGen’s Subadra Rajappa said.
Right. And if you just look at the market action on Wednesday afternoon, it is abundantly clear that folks think Powell has just made a policy mistake.
All of this comes with the caveat that there’s hopefully an underlying logic to this and you can read about that logic in:
“‘Through The Looking Glass’: Aleksandar Kocic And The Fed In Convexity Wonderland”
On the “bright” side for Jerome, this could well be the last “mistake” he ever makes as Fed chair because you can be absolutely sure that the wheels are turning as fast as they can right now in a certain someone’s “very large brain” which is trying to find the right derisive Twitter nickname for Powell before firing him.
“Plain English, folks. Do you speak it?”
Sorry, I will have to demur Most of your post.
Powell is a heck of a lot better than Greenspan Fog..
But then I’m a little giddy on today’s TZA position. .
No need to apologize, but it just is what it is. His approach is creating volatility, at least in equities and credit. There’s no question about it. Whether that’s deliberate or not is another question and the fact that rates vol has remained suppressed may be a testament to effective normalization, but there is no arguing with what’s on your screen. There’s also no arguing that he came across as stammering and not sure-footed in the presser. Again, it just is what it is. He’s no Draghi. Take a look at market reaction last week to Draghi ending QE versus today’s hike. That’s really all you need to know.
What Draghi is currently doing doesn’t seem to me to be particularly difficult. If Powell were to come out and say “No hikes until at least through the summer of 2020 and we are pausing the liquidation of the balance sheet” what would the reaction be? The markets would explode higher. A monkey could do what Draghi, Bernanke and Yellen accomplished; holding rates at 0 and flooding the markets with liquidity. Getting into a trade is the easy part, getting out is where it gets difficult.
lol. yeah, ok. it’s not difficult to unwind a $4.5 trillion buying program that spans multiple countries, multiple sovereigns, corporate credit, LTROs and NIRP amid a fracturing currency union where all the members run disparate fiscal policies.
that is quite literally one of the most challenging dynamics to navigate in the history of economics/finance.
Exactly my point. What Powell is doing is difficult; unwinding. How can you be so sure it his approach that is creating the volatility and not the act of the unwind itself? Draghi hasn’t unwound anything of consequence. Real rates are what negative 1.5% in Europe? Come on.
“You can’t argue with what’s on your screen.” I think some dip buyers still are doing just that, and that shows how momentum can be perverse both in memory and when the steam roller is about to knick that finger grabbing a dime.
Stepping back and taking a broader view… It’s pretty pathetic that: (1) Japan and Europe couldn’t grow their way out of a paper bag despite YEARS of low/zero/negative interest rates, and (2) the mere specter of rates going into the low- to mid-3%’s is enough to send our risk assets spiraling lower. Let’s shake out the rugs and get ourselves back something more closely resembling REALITY… By the way, happy holidays!
It’s not that it is a problem to speak plain English when it comes to economics, your real problem is that he speaks plain English to a pack of entitled, freeloading brats. The same brats who brought the economy to a screeching fucking halt in 08 . That’s right, the speculator class that is doing its best to rob Main Street to line their own pockets to this day. Something for nothing; always winds up bad for most.
Have you ever looked up “regular guy” Jay’s net worth? You should give that a shot and then compare it to Janet Yellen’s net worth and tell me who is more “Main Street”.
Also, look up Powell’s CV and compare it to Yellen’s CV. Again, tell me who is more “Main Street”.
Tim Knight gave a good analogy for what’s going on in the markets. Also…for those that are bears…Tim Knight is the bearish guy I know…
https://ontt.tv/2LqgOxy?utm_campaign=tt-ios&utm_medium=sms&utm_source=social-share
QE was morphine. QT is chemo. It sucks. It may suck for longer than you wish and you may still die.
All those “Brock Turners” that lobbied for the dereg that gave us the GFC should have gone to jail with Lehman. But those asshats got a bonus, a Congress and a POS and a mountain of lobby jobs, and cheap money to sell at premium. I am tired of people blaming the fed for shit the fiscal and dereg racoons/mafia setup.
The GFC piper has to be paid. The mega rich insiders want the plebs to pay as always. Blaming Powell because your calls expired otm is just lazy populism. Nuff sed.
Thanks, H. My life is literally richer reading your snark and insight. Merry fucking Christmas! Lol. I wish I could pay for an annual sub for your writing. Worth every penny.
QT and increased supply and 10yr sub 2.80. Being absorbed pretty well. Stocks are priced at the margin so sellers (due to risk managers etc) sell and buyers sit on their hands because they are mostly full up. Kind of like CDS at 50bps on GE, you buy that all day but the fool sells it. Then when the seller tries to cover it is at 400 before you know it. Did this increase and meeting really change things? Not really, we think Powell is Bernanke and is going to break it but will he? Labor still tight but wage growth is still ok, energy costs helping on pressures, CFOs will be more cautious on spending helping apply the brakes, rates helping housing, etc. other than corp debt (which is not an immediate economic risk) and govt debt (which this unrest is helping) there aren’t too many real excesses. Bank capital is fine. And this unrest probably leads to the end of the trade war. Stocks pricing in a 20% decline in earnings for the SP500. If i am running a pension fund would I rather own stocks at 5% FCF yields or bonds at 2.75? It was fashionable to be bullish in early 2018 and for some in Sept of 2018 and now it is fashionable to be bearish. Being rational can cause underperformance in the short run but if Powell isn’t totally clueless I think there are opportunities out there. For the first time in a while some quality names look attractively priced to me. I feel like I am alone on an island or just maybe I am about to be shipwrecked. I’ll know in 6 months……….. Be smart, do your homework, watch your risk and good luck trading and investing.
I don’t know why Powell is getting all the flack as he may have influence on the other voting members, but finally it’s a majority decision. As for plain speaking, at last he’s used the term Emergency Reserve Fund instead of the innocuous Fed Balance Sheet. As someone from PIMCO stated on CNBC last night, he’s telling Wall Street to grow up and stop relying cheap money handouts from the Fed.
In 2008 while running a hedge fund I lost 8%. I was right about what was going to unfold but I still managed to lose money. The secret to my “success”? I thought the FED and other policy makers would see what I saw and then adjust accordingly. They did not. Yesterday Powell just convinced me they (or at least he) did not learn from the mistakes leading up to and then during the GFC. Do they not understand what bringing on a recession would do to the Federal Fisc? We are talking $2T deficits. Try calming markets when that becomes reality. Next year the tax cuts grandfather, housing will still be constrained by higher rates, autos are at best flat, global economies are stagnate, Washington is in disarray, inventory build is increasing and capital spending in the oil patch is about to go negative. Exactly how do we get more than 1 1/2% growth? The FED succeeds again.