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.
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.
The dollar surged.
10Y yields dove 6bps to their lowest since April.
The curve obviously bull flattened.
It looks like the market is reading this as a policy mistake. Oh, and have a look at this:
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:
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?”