Critics Decry Fed’s Dovish Pivot. Does Powell Deserve The Derision?
There was more than a little perturbation Thursday among the Fed's legions of critics.
With the US economy still performing well (as far as anyone knows) and core inflation still double target, the idea of an overt dovish turn was anathema for market participants with a penchant for Fed contempt. For that contingent of observers, Jerome Powell's press conference performance was nothing short of a travesty.
"The absence of intellectual honesty is astounding. The inconsistency maddening," JonesT
I have to believe the Fed went into Wednesday’s release and presser with their eyes open to the impact it would have on markets, and they were clearly okay with it. That suggests they wanted a very mild form of easing, presumably to maximize the glide-path available for a soft landing. Sully never wanted to be in a position to have to execute an emergency landing with a plane full of passengers, but the Hudson River did offer the major advantage of being a really long runway, giving him the room and time he needed to maneuver into a perfect splash-down. After all, the real impact of easing financial conditions on the inflation and the economy will be negligible in the very short term, and minimal in the medium-short term. To the extent lower 5 years (or whatever) helps a business clear their hurdle for new investment, that still takes months to a year+ to manifest in real activity. It’s unlikely any family will change their holiday spending plans tomorrow in consequence of a 5% bump in the Russel 2000 today. At this point, easier FCI just means the Fed’s hand isn’t forced into a QT wind-down or “insurance” rate cut sooner than they’d like. A longer glide path = more flexibility to be a supplier of convexity when it’s needed most. And it’s an election year…
I think the Fed has done a pretty good job steering through a pandemic/post-pandemic period that has befuddled everyone’s models. A good part of the inflation surge was indeed transitory (supply chain-driven goods shortage, virus-driven labor shortage) and a good part was fueled by the government’s pandemic measures (stimulus in never-before-seen quantity). No economic model was capable of forecasting the weirdness on the last four years, so the Fed rightly dropped its models and started vigorously ad-libbing aka data dependency.
The economy has remained strong, inflation is coming down, and the Fed may well manage to grease the landing. One can debate how much has been pilot skill and how much has been luck + circumstance, but isn’t that always the case?
Powell has his issues as a communicator, and the FOMC in general talks too much, but he appears to be able to lead and manage the committee and, I suspect, commands significant respect from its members.
I think derision is unwarranted, and that the peanut gallery are a mostly bunch of, well, peanuts. I also think the Fed chair is not required to publicly conform to some predictable logic of decision-making or be bound by prior statements – he can change his mind and needn’t apologize for wrong-footing the peanuts.
But I think there is room for us peanuts to feel some some discomfort and worry. It is not clear that policy is actually restrictive, despite the FF-CPI spread – ref back to models not working. It is not clear that the hard core of wage-driven inflation has actually been broken, with as many still-hot labor market data points as there are cooling data points. It is not reassuring to see yield curves re-inverting and term premiums negative, and I struggle to find attractiveness in 4% long yields.
Regardless, my (or anyone’s) agreement or disagreement with Fed policy is pretty irrelevant. The FOMC has pivoted hard to dovish, it is what it is. If we were wrong-footed and lost money in the last two days, tough luck. We should focus on what to buy and sell.
The last 24 hrs have been good for my positioning, and the stuff I need to buy now are mostly things I wanted to buy anyway, so time to buckle down and do the work.
Well said, sir.
Mmmm. I wonder if some folks at the Fed are quietly waking up to the idea that raising interest rates had only a limited impact on inflation. With outsized collateral damage.
Such as making housing unaffordable for most Americans. As JL noted, their models could not cope with the idea that higher rates would discourage sellers rather than buyers.
Powell and his colleagues were late in recognizing pandemic inflation as a problem; everyone gets that. But once he and they did, they’ve done a darn good job in catching up. As for his style of communication? I might be the only person in America who thinks this, but I think Chair Powell has been just what we needed in this particularly fraught moment in our history. Overall, I give him an A-.
+1. You’re not the only person . . . except I’d given him an A+. He has an impossible job.
For a take on what’s behind the Fed shift, see David Rosenberg’s piece today “The Fed Just Woke up and Smelled the Recession”
Did the Fed betray a hint of concern about recent data? Perhaps not just data of the economic variety but also of the presidential poll variety? They are human after all, they may be apolitical as well, but if a group of technocrats has an interest in not seeing a return of the Don the FMOC is near the top of the list (can’t blame them). Perhaps the combo of economic deceleration, declining inflation and rising poll numbers for Trump is reason enough to pivot now in dovish fashion.
I suspect there’s something to that, and shame on me for not factoring it in.