Here are a couple of quick notables which will probably fade into obscurity following the jobs report and Jerome Powell’s hotly-anticipated comments.
First, Loretta Mester showed up on CNBC Friday morning and some of her comments suggest that a consensus is building around the possible necessity of tweaking (or even halting) balance sheet runoff in the interest of allaying market fears.
We’ll spare you the editorializing and just hit you with the bullets (figuratively speaking of course):
That bit about the Fed having “always left open the option of balance-sheet change” comes hot on the heels of Kaplan’s comments delivered in a Bloomberg interview during which he reiterated that, in his view, the Fed should be “very open, if necessary, to making adjustments to balance sheet runoff”.
In short, it looks like they’re coming to the conclusion that contrary to Powell’s persistent “this is going smoothly” rhetoric, it is not in fact going “smoothly” if you look at the side effects and also if you conceptualize it for what it is, which is a tightening impulse (QT) on top of a tightening impulse (rate hikes) at a time when Trump’s stimulus is already increasing the net supply of Treasurys that the market needs to absorb.
Here’s the Mester clip:
It’s not clear to me that a pause in the hiking cycle or even a rate cut late in 2019 are going to do it when it comes to resurrecting risk sentiment. The market is already pricing that outcome and it’s hard to see how, anecdotally speaking anyway, that can run much further. What would it say about the economy if the market starts pricing in multiple cuts? It’s possible that halting balance sheet runoff would be the best option, although it would cast considerable doubt on the Fed’s credibility vis-a-vis “feeling the market” (to quote Trump) given that as late as last month, officials continued to insist that QT was on auto-pilot by virtue of how well it’s purportedly going.
Switching gears, Trump on Friday morning blamed Democrats for the stock selloff. This is obviously absurd, put he’s desperate for scapegoats.
“As I have stated many times, if the Democrats take over the House or Senate, there will be disruption to the Financial Markets”, the President tweeted, before reminding everyone how the midterms worked out in case you forgot: “We won the Senate, they won the House.”
He then reiterated his “glitch” characterization of the selloff, promising that “things will settle down”.
Finally, he insisted that the only reason anybody wants to impeach him is because folks are jealous:
They only want to impeach me because they know they can’t win in 2020, too much success!
In a way, that echoes the Fed’s assessment of balance sheet rundown: “They only want us to stop it because it’s going so well – too much success!”
No matter who or what is responsible, one thing is for sure: Investors are so sick and tired of all this winning!!!