As we begin the new year there were many developments of note that will mark where we’re all going from here. One was: the current volatility happening across all markets. The other: the Powell, Yellen and Bernanke conversation in Atalanta. Hint: The latter is responsible for the former.
If one watched this exchange between former and current Fed. Chair it wasn’t hard to construe that the term “independence” implies far more than just the political implications. It also appears to stand as independence of consequences via their actions. i.e., what they’ll unleash via monetary policy has consequences for everyone else – not them. In other words, they are independent via their guaranteed pensions, near guaranteed high speaking fees, fellowships for regulatory capture, celebrity media status and more.
Not a bad gig if you can get appointed, no?
And it is with another “no” I would like to begin, as in Mr. Powell’s terse response to the question of (paraphrasing) “If the President asked you to resign would you?” The answer? “No.”
Both the answer, as well as the manner delivered, gives far more insight to how the Federal Reserve views itself in regards to the nation. i.e., Not only is it above all political reproach, it is also above all political leaders. Here’s why I say this…
Whether you’re a business leader, or a political one, there are some things you know instinctively not to do. i.e., make any statement or suggestion that can be interpreted as antagonistic unless – that’s precisely what you mean to do.
To do otherwise is highly imprudent and opens a door fraught with unsavory consequences. I believe Mr. Powell’s “no” is going to be met with far more words and actions down-the-road than either he, or his predecessors ever believed possible. Never-mind ever considered
That question posed to Mr. Powell should have been met with an emphatic rebuke, and should have been answered with something similar to:
“I am not going to respond to that question. If ever a day should come that the President would formerly ask for such a thing. I could only assume that both he and I would have had many discussions prior concerning what was the best monetary policy for the nation. The Fed is, as you know, an independent body. And to discuss such hypotheticals in the public domain is not just unseemly, but also, improper. So, do you have anther question more appropriate to this discussion?”
Saying something akin to the above fits far more inline with what is known as diplo-speak. i.e., you put one on notice via using another that their public calls are not helping, while setting yourself upon the high-road that you are willing to not disparage them, or their calls in public. All while insinuating the two of them should get together, behind closed doors, and maybe air a few things out.
However, that’s not what came from that stage.
And yes, I am fully aware that it is easy to sit back days later and evaluate after-the-fact, then think and write the above while not under the pressure of lights, cameras and an audience.
Nevertheless, with that said, I am also fully cognizant that a terse “no,” in public, is a diplomatic statement for political war, which is why great care and forethought must be used when delivered in such a setting and involving said participants. If it wasn’t intentional, then it will be interpreted as more evident to a Freudian slip, which can be even more problematic.
This is why people fluent in diplomacy, at all levels of politics, as well as business, are always in high demand. For it only takes one word – at the wrong time – in the wrong setting – to bring everything once considered stable into roiling turmoil.
Mr. Powell’s “no” may go down in history as the opening salvo that launched the war that lost the Fed its independence. And no, that’s not hyperbole. Here’s why.
The “markets” have now shown that they were what the few of us have been calling them for these many a year: A Potemkin Village built via a house of cards upon quick sand. And without consistently holding interest rates at the zero bound, along with more iterations of QE (quantitate easing) it all crumbles.
And that is precisely what has happened.
The “balance sheet normalization process” (QT) was supposed to be a non-event. Something akin to running-in-the-background type of policy adjustments.
The entirety of the so-called “smart-crowd” paraded across the entire mainstream business/financial media (along with the Fed itself) implored it (QE) wasn’t the reason why stocks were bid up this high – more of a correlation type phenom as opposed to causation was the thinking and explanation process. The problem?
Hint: have a look at any 401K December statement. That is, if one dares.
Now the only thing that appears will placate the “markets” is that the Fed. publicly state that the balance sheet process is not on “autopilot.” Which Mr. Powell did. Does it matter? I don’t think so.
The problem with the balance sheet process is that it is doing exactly what the Fed said it would – it’s running automatically in the background. Which is precicely where the Fed’s real problem (along with the “markets”) truly lie.
If the Fed stopped the process right now the damage is already done. Unless the Fed suddenly announced that they were reversing, not stopping, but reversing the QT process with another round of QE – where would the money come from to bid up (and sustain) the “markets” again?
Sidelines? Please, don’t make me laugh for that is one of the greatest fallacies ever spewed. It’s a myth, a ruse for conning the ill-informed.
As we sit here today the Federal Reserve will meet at the end of this month. Here’s what you should be acutely aware of:
There is no press conference scheduled. So if you’re waiting to hear the soothing tones of doves – forgetaboutit. The best you’ll probably receive is “no interest rate change.”
Do you think they’ll change the balance sheet schedule with no press conference, along with a jobs report that implies what they’re doing is working and what they’re concerned about (i.e. wage inflation) is showing signs that they need to be even more diligent? Hint: Again, I doubt it.
Which there again lies the real problem, for the balance sheet is now on “autopilot” and in hyper-drive speeding along at $50 Billion per month.
If the Fed stopped at the next meeting Dec. and Jan. would have already taken effect. If they don’t? The “markets” will have to conclude that there would be no change till at least March. And by then that would mean another $100 Billion of reductions had already transpired.
Stopping would be irrelevant – only a complete reversal would have true impact. Stopping would only result in re-fueling headline reading algos into ephemeral knee-jerk responses. Which is precisely what I believe happened at the end of last week. i.e., It’s a respite not a reversal or end.
Again, I’m firmly in the camp of that it no longer matters what they say – only a complete reversal will halt the already trodden ground over the accumulating BTFD (buy the f’n dip) corpses.
Yes, accumulating, For the damage already done is far from over as to its ongoing and lasting psychological affects. Just wait till many open their year -end statements and find to their horror printings in red ink.
And when it comes to what the Fed says about its independence such as how the Chair would respond should the President ask for his resignation? All I’ll say is this:
The Chair is absolutely correct in his assessment of independence. However, when it comes to that independence it would be fair to say there’s a reason why one needs to heed their words not just for the markets interpretation, but also the political.
For it may just be the person that has the last word in this matter is the President, for he may utter a word that strikes fear into the heart of the Fed itself. And that word is: audit.
For it can be easily demonstrated by anyone caring (like a President and administration under fire) to look, and show, that it is blatantly obvious that it is the Fed’s current policy of interest rates and balance sheet reduction that is erasing all the “good work the administration has done with growing the economy and jobs.”
I can hear the administration arguing something along the lines of…
“Well of course the Fed has independence, but with that independence comes even greater responsibility, especially in times like these. That’s why we’re going to begin arguing for greater visibility into exactly what and why the Fed is doing what they’re doing and are calling for legislation to audit them. After all – just look at these markets!”
The one who has the last word in this matter may not be the one many think or believe. Especially those that believe they are absolved from such.
© 2019 Mark St.Cyr
I was just made aware that the Federal Reserve has changed its press conference schedule from the every other meeting ( or 4) to now there will be one after every meeting for 2019. (e.g., now there’ll be 8) And if that changes my thoughts in any way. Here’s my response:
No. As a matter of fact I believe it will bring even more volatility for these two reasons:
First: That means every meeting has to now be considered “live,” where an additional interest rate increase may be possible. Everyone will think this means that there’s now opportunity for the Fed to pause. That may be true, but that also means if the data (data the Fed focuses on) continues to be good, then the Fed can also accelerate. Doesn’t mean they will, but that does mean it’s a possability and will have to be factored in, regardless.
Second: This now means the Fed has twice as many opportunities to say, or not say the wrong thing, at the wrong time, which now doubles the possibility for increased volatility at every meeting.
As I stated earlier – it may not matter what the Fed says as to halting the already accumulating carnage. However, what they can say is the wrong thing (as well as not say if the “markets” are looking for it) at the wrong time something that can exacerbate any further market mayhem.
After-all, if everything was going along as swimmingly as they have been stating it has, i.e., “We got this!” Then why the need to increase the pressers at all? Think about it.
As always, we shall see.