As a general rule, macro-market snark tends towards the conspiratorial only as it relates to purported left-wing conspiracies.
Of course, capitalism — and particularly shareholder capitalism — is on some interpretations the biggest conspiracy in human history. That’s pretty difficult to avoid if your raison d’être’s market-focused sardonicism.
Squaring that circle usually entails claiming, implicitly or explicitly, that capitalism was captured by a neoliberal “establishment” which is at best inept and at worst nefarious. All the societal ills which flowed forth thereafter are the fault of that establishment, not anything to do with capitalism itself. (No Marx allowed.)
That’s indicative of the broader gaslighting campaign embedded in a lot of post-2016 macro-market color which, wittingly or not, doubles as apologia for autocratic backsliding in the developed world: Ignore myriad plain-as-day, out-in-the-open conspiracies and worry instead about far-fetched narratives for which there’s no proof whatsoever.
I speak from some experience, having spent 14 months in 2015/2016 as a right-wing provocateur. My explicit mandate involved penning conspiratorial market narratives for consumption by a gullible Wall Street and buy-siders with more dollars than sense.
With allowances for the distinct possibility that near-fatal amounts of bourbon, scotch and “VOHD-ka” were making me hallucinate, it often felt like I operated with an unspoken directive to promote an illiberal world view under cover of macroeconomic commentary.
I bring this up on Friday because I’m seeing the same dynamic play out with regard to Kevin Warsh, who sundry market commentators lauded for delivering a fully-priced, 25bps rate hike when inflation’s 1.5ppt above target and the jobless rate’s 4.1%.
As the figure above reminds you, headline CPI and the UNR were more or less identical in May. You can argue that’s not a useful data point given all-items price growth was heavily influenced by surging energy costs, but that’s akin to suggesting soaring gas prices don’t matter for households. (You can’t have it both ways.)
Since May, that spread widened as inflation receded amid falling crude prices, but oil quickly rose back into the triple-digits, and anyway, CPI 3.4% and UNR 4.1% doesn’t exactly make a dovish case for monetary policy. The long run average for that spread’s 2.02ppt, or nearly triple the current 0.7ppt.
At the same time, financial conditions are the loosest they’ve ever been, or close enough to it.
The figure above shows one of the Fed’s own measures of national financial conditions. On the eve of the September FOMC meeting, it was not materially different from where it sat prior to the onset of rate hikes in 2022.
Warsh has repeatedly — including during this week’s press conference — conceded that it’s difficult to describe financial conditions as restrictive. But that’s not a credibility-building concession, it’s just a statement of readily-observable facts. (Obviously, the housing market’s a different story.)
Moreover, the market signals Warsh was so adamant about “allowing to speak” were screaming at him. Twos were 100bps (!) wide to EFFR headed into this week. As I emphasized repeatedly in the run-up to Wednesday’s policy decision, that was the front-end telling Warsh that yes, he needed to hike tomorrow, but really he should’ve hiked yesterday.
Ironically, this isn’t actually a discussion about whether the rate hike itself was the right move. I can make a case that it wasn’t, demand-side levers being ineffective at solving supply-side problems. Rather, the debate is around whether Warsh did in fact do something this week that a reasonable person should be expected to interpret as evidence against the notion that he’s a sock puppet for Donald Trump. The answer to that (implicit) question is an emphatic “No.”
Indeed, there’s nothing Warsh can do, short of getting himself fired, to convince me he’s not at the Fed first and foremost to serve Trump’s interests. Because as I’ve been over half a dozen times, anyone who’d accept the Fed chair position after witnessing what happened to Jerome Powell and Lisa Cook over the past 12 months isn’t — can’t be — credible in an absolute sense.
Warsh can be credible in a relative sense, and indeed that’s the only reason he’s there: Trump’s advisors told him that choosing the “other Kevin” (Hassett) would be too risky from a credibility standpoint even for the most credulous, MAGA-friendly market participants.
On Friday, I read an analyst note that praised Warsh for the “terse” character of the last three policy statements.
There’s the chart. It’s from this week’s installment of BofA’s popular “Flow Show” series.
“The Fed [hasn’t] been this terse since 2007,” the accompanying color read, adding that “a return of credibility and an end of ‘oversharing’ are long-term bullish for market resilience.”
Rather than resort to the sort of unduly abrasive cadence that’s often counterproductive when you’re trying to get your point across, allow me instead to propose a hypothetical.
Kamala Harris is president and Lael Brainard’s Fed chair. The right’s livid and (fairly) points out that Brainard was on the board and served as vice chair during the worst bout of inflation America’s seen in decades.
Brainard reminds critics that she was also vice chair for the most aggressive rate-hiking campaign in half a century, but the right (again fairly) says that doesn’t change the fact that she was riding shotgun, helping Powell navigate when the car flew off the tracks.
Unconcerned, Brainard exacerbates those decidedly dicey optics by eschewing rate hikes during her first two meetings as chair despite a renewed bout of inflation, which unhappily puts headline CPI back on the 1970s/early-1980s double peak analog.
It then emerges that Harris and Brainard spoke on the phone at least three times during the latter’s first two months on the job.
By her third meeting as chair, twos are four hikes wide to EFFR, and futures are pricing a 91% chance of the hike Brainard didn’t deliver at the prior two meetings. She hikes.
Hours after the hike, President Harris says of Brainard, “I told — I talked to Lael, and I said, ‘You might as well vote with the board. It’s not going to matter.'”
Is Fed Chair Brainard newly-credible in that scenario?
