“It’s possible we won’t see the same pressure on the Fed to back off if markets continue to wobble like they did in late 2018 for the same reason — a Fed determined to tighten policy,” Morgan Stanley’s Mike Wilson said, in his latest.
For months, I’ve suggested the Fed risked turning December 2021 into a rerun of December 2018, when Jerome Powell inadvertently exacerbated his fateful “long way from neutral” communications misstep with the equally misbegotten “auto-pilot” faux pas.
Increasingly, Wall Street is drawing the same parallel. And they’re also folding in another dynamic I’ve discussed at length — namely, the distinct possibility that the Biden administration views inflation as a bigger political liability than a stock market crash.
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During 2018’s final weeks, Donald Trump’s effort to arrest the slide in stocks was a comedy of errors.
For example, Steve Mnuchin scored one of the most hilarious own goals in recent market history when, on a Sunday night, he released a statement declaring the banking system stable following a call he convened with Wall Street CEOs. No one (not a single soul) was worried about systemic risk at the time. It wasn’t that Mnuchin raised more questions than he answered. Rather, there were no questions in the first place. Or at least not until Mnuchin’s press release.
A day later, Trump exacerbated an already bad situation by declaring, in a tweet, that “The only problem our economy has is the Fed.” He continued, employing his trademark balderdash and penchant for turning regular words into proper nouns: “They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!”
“He” was Powell. And markets were aghast.
Ultimately, though, the message from the White House was clear: Stocks needed to go back up. And posthaste. Trump reportedly explored legal mechanisms for firing Powell. At one point, there were even rumors that Mnuchin’s job wasn’t safe.
Fast forward three years, and Powell is once again poised to lean hawkish at a pivotal December FOMC meeting against a fraught macro backdrop. The difference this time is that political expediency arguably demands tighter policy.
Even if monetary policy is mostly impotent in the face of inflation caused by supply chain disruptions and labor shortages, The White House likely believes the appearance of a concerned and proactive Fed may help Biden’s poll numbers, especially if voters come to identify Powell with the inflation fight just weeks after Biden chose to renominate him for a second term.
That conjuncture poses a material risk for equities, notwithstanding outsized rallies like that seen on Monday and the follow-up bid for stocks witnessed Tuesday.
For Nomura’s Charlie McElligott, the coming weeks will be accompanied by a handful of “tangible risks.”
“Tactically, Op-Ex and Fed is always a combustible matchup, while CTA deleveraging ‘sell triggers’ will remain proximate after this covering squeeze tuckers out,” he wrote Tuesday, on the way to noting that even as implied moves lower amid the bounce, crash pricing continues to telegraph angst due both to actual consternation and ongoing supply/demand imbalances in the vol complex.
He reiterated that until inflation begins to abate (i.e., until the political optics improve), the “Fed Put” strike is lower. The bar for the Fed to soothe markets “is too high with inflation remaining at the forefront of the political conversation,” McElligott said.
Notably, if policymakers across the world implement new lockdowns as the Omicron variant spreads (or simply as a result of seasonal virus flare-ups), it could worsen inflation pressures by prolonging supply chain disruptions.
That’s not to suggest containment protocols aimed at saving lives aren’t necessary. That’s not my call to make (thankfully). It’s just to note that the longer it takes for humanity to reach herd immunity and/or for the virus to (hopefully) evolve into a less-deadly epidemic (versus a terrifying pandemic), the longer it’ll take for inflation to normalize.
That, in turn, risks hardening the Fed’s resolve. “If the data further accelerates and crystalizes their hawkishness into more tightening, they’ll likely be powerless to intervene with the usual ‘market jawboning’ to ease potential stress-points through the usual dovish guidance,” McElligott remarked.
On the bright side, we don’t have to worry about Joe Biden taking to Twitter to express any grievances he might have with Powell, the economy, Republicans or anything else. If there was one thing almost all professional market participants could agree on during the Trump years, it was that irrespective of whether you loved the former president or despised him, it was preferable if he eschewed the temptation to tweet about stocks at delicate junctures.
Notably, if policymakers across the world implement new lockdowns as the Omicron variant spreads (or simply as a result of seasonal virus flare-ups), it could worsen inflation pressures by prolonging supply chain disruptions.
Shouldn’t it also help expedite the demand overflow we’re experiencing? If people start fearing for their income and without visible fiscal support in the offing, maybe consumers will stop pushing pedal to the floor on spending?
Has Jaypo learned to putt?