Fed Put Re-Struck On ‘Tier 1 Political Hot Potato’
We've seen it before. The Fed pivots hawkish, only to recant in the face of a market revolt.
On the heels of Jerome Powell's abandonment of "transitory" last week, I suggested the Fed chanced a December 2018 redux. Between the apparent prioritization of fighting inflation, the prospect of an accelerated taper pace and the implications for liftoff of a taper that ends three months ahead of the original schedule, the Fed is on the brink of implementing a multi-faceted tightening push -- without a
Powell is flexible and subject to data and market gyrations. That is good. He was correct to pivot tighter. The economy was given several shots of morphine over the last 2 years and rightly so. If it was too much, the easiest way to adjust is for the Fed to taper and if necessary raise rates off the zero bound. If the economy runs hot and the FOMC does this that is a good thing. Being at the zero bound for interest rates is suboptimal from central bank policy making and economics anyway. If the FOMC is able to raise the funds rate to 2% or more for the right reasons- the economy is growing fast/running hot- what is the problem with that? In fact, if you really think about it, that is ALL GOOD. The problem for the FOMC is the question – is this a head fake and the economy fades just as they start to tighten? Solution- stop buying bonds, and wait and see a little bit before raising rates after the taper is done. Better to be a little bit too late than too early. And it appears that is what Powell and Company are doing. Nobody has a crystal ball. And Powell stumbled in 2018-19. But he seems to have learned from his mistakes…. it is all you can ask.
H-Man, when Powell did the pivot he was encouraging inflation which was a stated goal of the Fed. Now that his wish has come true, not sure a pivot will be an escape hatch. Methinks he will stay the course until the demon has been subdued.