I Got You Fam
December 19, 2023·Money
Last week, Jay Powell told you that the Fed intends to cut interest rates next year, not because they must, but because they can.
And there was much rejoicing.
With unemployment securely below 4% and close to record lows, economic growth moving ahead smartly at 3%+ and core inflation sticky at 4%, there is absolutely no need from a mandate perspective (price stability and full employment) for the Fed to cut rates. On the contrary, given that sticky 4% core inflation, keeping to the plan of higher-for-longer would be the Official Mandates thing to do. Oh sure, the Fed would cut interest rates if we had a hard landing – a nasty recession with all the job losses and below-potential economic growth that entails – but that’s part and parcel of the Official Mandates. This is different. This is Powell pledging his allegiance to the Unofficial True Mandate – the political and foundational mandate of the Federal Reserve – to ensure price stability not of goods and services in an inflation sense, but of assets and stocks in a wealth effect sense. This is Powell saying that he intends to cut interest rates even if there’s not a nasty recession, or even any recession at all. This is Powell saying that he intends to put more alcohol into the Wall Street punch bowl in 2024 because … well, because who doesn’t like a good party? Especially in an election year.
Do I think this is a partisan political thing? Nah. I really don’t. I don’t think it’s a partisan political thing because this is exactly what Powell did five years ago, right after Christmas 2018 dinner with then-President Trump. On January 5th 2019, also with unemployment < 4% and economic growth >3%, also with the commercial real estate guys and their Renfields gnashing their teeth and rending their clothes about the “disaster” of normalized interest rates, Powell totally reversed course on his 2018 hawkish resolve on interest rates and balance sheet operations. The only difference with today is that at least in Q4 2018 you had an actual bear market to fix. But the lip service to price stability in an inflation sense and the abiding loyalty to price stability in an asset sense? Oh, there is no difference at all.
As the Maya Angelou quote goes, “When someone shows you who they are, believe them the first time.” I didn’t believe, tbh. I thought Powell was going to be resolute in 2018 and I thought he was going to be resolute today. As usual, Maya Angelou was right and I was wrong.
It may not be a partisan political thing, but it IS a political thing, as in a power thing and as in an Executive branch thing. Of course Powell’s volte-face in December 2018 and December 2023 is directly connected to White House guidance and encouragement. It’s a power-in-the-real-world thing, regardless of what some piece of paper may say about “institutional independence”. And like all political things, it is paying for the party and the punchbowl today with debts that must be paid tomorrow.
That debt is inflation.
Last week, the Fed raised their inflation target without saying that they raised their inflation target. Honestly, I don’t believe that they even have an inflation target anymore.
Will they be able to maintain the fiction of a 2% inflation target in narrative-world? Probably. For a while, anyway. Through next November, I’m sure the White House hopes! But inflation is a bird that always comes home to roost. And when it does, we will look back at Powell’s Christmas 2023 I got you fam pivot as a bfd in the Great Unmooring.
PS – I went back and looked at some of the notes I wrote right before and after Powell’s Christmas 2018 I got you fam pivot. They hold up well!
Lord Make Me Chaste … But Not Yet (Dec 2018)
Uttin’ On the Itz! (Jan 2019 and Sept 2013)
We Are All Epsilon Theorists Now (Jan 2019)
They’re Not Even Pretending Anymore (Feb 2019)
PPS – We published a beautiful note by ET contributor Sir Steven Wilkinson yesterday, where Sir Steven returns home to Lancashire to say goodbye (?) to his father. There’s no true conversation to be had, only fragments to be gleaned, and that will have to be enough.
The End is My Beginning https://www.epsilontheory.com/the-end-is-my-beginning/
Tick-tock, my friends. Tick-tock.
Comments
So the total wealth of the nation continues to grow at a rate that outpaces GDP and the reckoning is forestalled…but for how long?
Lower rates mean Treasuries can go back to paying very little, which is great for a government addicted to spending borrowed money. Reducing the national debt—and reigning in spending—is forestalled…but for how long?
Are the Boomers adding a few more minutes to the clock that governs the ticking time bomb and hoping they’re in the grave before this all goes off?
So I’ve read the transcript a few times and I don’t see the dovishness, I do see a decided lack of hawkishness but that’s about it. Now to be clear, what I see doesn’t matter one iota, the market liked what it heard and has ripped higher. The common knowledge is now a dovish pivot.
That said, sometimes I struggle with a bit of chicken/egg when it comes to narrative. For example, is. the narrative driving the market or is hard to explain market action creating a narrative for us simpletons to understand? Figuring out which is which can be a big challenge! Remember when we were told tech stocks were richly valued because rates were so low? I haven’t heard too much about that lately…
Pretty much since the hiking cycle began, whenever the market would get ahead of itself pricing rate cuts JP would use his press conferences to kill the idea. This was a well known and well hedged event. When that hawkishness didn’t materialize and all the puts that had been bought were sold or expired, the dealers would’ve been mechanical buyers of SPX in order to unwind their own hedges from selling the options in the first place.
What’s CNBC gonna run with, a complex market structure story or “dovish pivot!”? Obviously dovish pivot checks all the boxes. We’ve had a few fed speakers come out since pushing back on the rate cuts narrative and so I’m left wondering what JPs true communication attempt was, whether he botched it and how he proceeds from here.
Curious to hear how other people are thinking about this.
I said—in multiple settings, maybe even here at some point—that the Fed was going to have to do one of two things: either hammer the economy into the ground OR find a way to pretend that their 2% inflation target was always fluid and that well akshually 3.2% (or whatever they land on) is close enough. I always assumed that option #2 would too badly damage their credibility (lol) and thus figured option #1 was the only way out. I was very very wrong.
I think Jay Powell is intelligent and experienced in markets.
I think he has intentionally chosen to prioritize growth over Inflation with his control over Monetary Policy.
I think the subsequent backtracking by his minions at the Fed was an attempt to limit the risk of out- of -control -markets and also preserve the image of the Fed as prudent Monetary Mavens.
I also think by making this choice he has once again chosen to reward the wealthy (stimulating financial asset prices, housing prices, etc) at the expense of Middle Class (the ones most harmed by inflation in goods and services)
So for people who don’t understand why, the vast majority of what used to be called the “Blue Collar, Lower Middle Class”, are enthralled by Donald Trump, this choice by a prominent member of the Elite, is a reason why (even though this group doesn’t understand monetary policy, they will feel the results in 2024)
They just want someone, anyone who will speak for them (even though Trump is a ridiculous choice to do so)
So would buying Treasurys while rates are still high (“ish”) be considered “tough love”?
The Fed already did this when they announced the move to Average Inflation Targeting a few years back. I remember being surprised at how little everyone seemed to care about such a significant change.
Could not agree more!
I think that’s exactly it. This is the Last Hurrah.
Powell never says that he’s gonna cut. That’s in the dot plots. What he said is that the Fed is available to cut. He’s saying that the Fed has Mr. Market’s back, which many (me included) were doubting.
As I have watched the past month and a half unfold, two old ET notes keep swirling around my head.
“The Long Now part 1” and “What we need to be true”
The first thought has to do with the punchbowl that Ben and DY are talking about. When does the bill for this party come due? How much demand can we pull from the future into the now? Valuations in every asset class except Fixed Income are stretched by any measure. We have stolen - yes stolen - 25 trillion from the future since the financial crisis.
I think the FED see’s the markets getting ready to call bullshit on the whole house of cards , hence the dramatic recent pivot in the jawboning. This brings me to the next ET note.
What we need to be True - with interest rates across the curve at 5% the math simply does not work. The longer they stay high the more debt rolls over at the much higher rates-- 50X higher in some cases than the rates the maturing bonds were originally issued. Interest on the federal debt is now so immense that it’s consuming 40% of all personal income taxes. The largest source of revenue for the federal government is increasingly being devoted to just servicing the debt, not even paying it down. A few more years with rates at these levels and adding 2 trillion per year and the party will be over. Massive tax increases and austerity level reductions in services will be the only options left on the table.
I agree with DY and Ben:
Lisa Shallett of MS introduced in a recent call that maybe the FED is seeing signs of instability under the surface that the public has yet to see, and maybe that was the genesis of the pivot.
The market celebrating this move down in rates, but at some point soon, I suspect they will not be seen as a positive.
Continue the discussion at the Epsilon Theory Forum...