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I firmly believe that Jerome Powell took office with the idea of knocking the financial excesses out of the market, but was scared off by Wall Street and Trump.
Powell thought the costs associated with cleaning up the Great Financial Crisis after the crash far outweighed the benefits of letting the bubble develop in the first place. He was determined to raise rates and stop a bubble before it gained too much of a foothold.
So when Powell took over as Fed chairman, he raised 2-year real rates from 0% to 1.95% – a massive amount of tightening. Yet it was similar to what Yellen did when she started. She too was concerned about not appearing too dovish. Rookie move of trying too hard.
The real question is whether Powell has now started a global economic slowdown that he won’t be easily able to stop. Given the collapse in inflation expectations, rates are not coming down nearly fast enough to kick-start the economy.
Let’s face it – fiscal stimulus looks slow-in-coming, so the Fed is once again the only game-in-town.
Watch the 2-year real yield (TIPS yield) for signs that Powell is dovish enough to stop the de-levering that looks to have begun.
My guess is now that it has started, the slowdown won’t be easily fixed. It will most likely take negative US real rates.
Don’t forget that Powell is now simply at the top of the range that Bernanke and Yellen operated monetary policy at.