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One Thing, One Last Scare, One Right-Tail
Jerome Powell isn't likely to do the "one thing" that could durably tighten financial conditions.
Although equities have retreated from summer rally highs, there's still palpable concern that Powell will fail to clear what's now a very high bar for hawkishness in Jackson Hole, thereby accidentally imbuing risk assets with renewed joie de vivre, at cross purposes with the Fed's inflation-fighting agenda. Indeed, the hawkish bar is now so high that he's virtually guaranteed to fall short.
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In addition to its dual mandate (stable prices, healthy employment), the Fed has to worry about a third thing: dollar strength. If anything is likely to get broken in the Fed’s tighter-for-longer regime, its EM. I think Powell and his colleagues are well aware of the risks and will try to strike a balance between uber-hawkish and merely aggressive — i.e., 50bps, 50 bps, 25bps, pause and see where things stand.
“50bps, 50 bps, 25bps, pause and see where things stand” sounds risk-asset-friendly.
Which could be okay if headline inflation falls steadily from 8.5% to the 5.5% level by year-end. Fed can’t stop there, but with inflation on a steady downward trajectory (fingers crossed) at that point, a pause to assess wouldn’t be the end of the world.
I’m thnking energy prices may flip from a big MOM help (deflation) to a moderate MOM hurt (inflation) in 4Q, based on crude, NG, and storage – masked by crack spread for now.
I found it somewhat ironic that the end of this post was followed directly by an ad showing a large blue-headed screw (assuming it was not targeted just to me personally).
BTW, accepting “just” 5.5% inflation for even three years will knock 17.5% off the value of everyone’s assets. Money goes away in a rush with inflation.
… “there’s still palpable concern that Powell will fail to clear what’s now a very high bar for hawkishness in Jackson Hole”
I wonder how markets would react if Powell cancels his speech and makes no public comments at Jackson Hole.
The speed and amount of tightening by the Fed this year is unprecedented, something H has documented well in his posts. The logical course of action would be to let some of the tightening filter into the economy and asses the impact before piling on another 100 bps in a rush, but the Fed won’t do that because they are under political and public pressure having fumbled their inflation forecast. In his wonderful book, Thinking Fast and Slow, Daniel Kahneman details how we humans tend to make a worst mistake when desperately trying to fix a prior error, Powell and the Fed are about to become a textbook example of such behavior in my opinion, my bet is tighter for longer will lead to longer economic pains for many even after inflation recedes to more tolerable levels. If we experience a nasty recession next year that all but guarantees a Trump second term and we still have sticky 3-4% yoy inflation, will it be worth it? Just to save the Fed’s credibility?
The FF futures market appears to believe that the Fed will keep hiking aggressively through at least early 2023.
The stock market appears to not believe it, or is willing to look through the next three quarters, or has otherwise lost its fear of the Fed.
I’m not sure how Powell and the FOMC can get the equity players back in line, just by saying things.
Umm perhaps I underestimated Powell’s oratorical skills
… and we still don’t know or understand inflation in all its granularity and at this time and place. Of global warming we have a much better understanding and a greater amount of data to support it. Inflation is interesting in how many and diverse are its descriptions. Soft or hard landings aside, we’d all gain if we came out of this situation with a much better understanding of inflation and how it can be managed for greatest economic benefit.