A quote to start off with: “It would be premature to […] speculate on when policy might ease” – Powell, Dec 1.
Another one, two weeks later: “[Rate cuts are] clearly a topic of discussion for us at our meeting today” – Powell, Dec 13.
Two weeks can apparently make quite a difference to a guy who uses indicators of which the best have lags measured in months and the worst measured in years.
It seems official after yesterday’s FOMC press conference – easier money is clearly on the way. However, one has to wonder, does the economy really need it?
On November 1st, 2023, the FOMC issued a statement “Tighter financial and credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation“.
The problem is, since that statement conditions have actually become looser – rampantly so for such a short period of time at a steep angle, with this November benchmarking a record in pace of easing. Right now, they are roughly as loose as in early 2022.
Goldman-Sachs’ and other financial conditions indicators, including the Fed’s own (see graph below), tell a story that clashes with the Fed’s rhetoric.
When conditions were loose (Nov 1), the Fed pronounced that they were tight. When they became looser (Dec 13), the Fed declared that the best way forward is loosening. What has changed for Powell to declare his pivot to easy monetary policy under such circumstance?
Are his reasons truly of economic nature?
A market frenzy followed Powell’s “pivot” to easier monetary policy, which put the icing on a move that could since the start of November easily be described as a melt-up. This 15% move in 33 trading sessions equals a 94th percentile move – strong, suffice it to say. Normally I’d be very excited, but the quality of the rally remains low.
At any past juncture when markets rallied during the choppy waters starting late 2021, Powell has battled the rally with the cry of “stop it, we’re not there yet”, pointing to the Fed’s long-term 2% annual inflation goal. Sure, the inflation rate has receded, at least in some areas. But not in others – and in any case, the goal is not an arbitrary reduction, it’s 2% – and it’s not here yet. Not my words, theirs.
This time Powell made no effort to stifle enthusiasm. In fact, he seems more to stoke it at this point. Going on, the Fed’s statements and its dot-plot are pointing towards a substantial rate-cut trajectory for 2024.
If they Fed truly had the balls to plunge headlong into the actually necessary measures to curb the long- (and not just short-term and superficial) impacts of inflation, the US would be staring down a recession scenario that it hasn’t seen for decades.
Such a recession (paired with a financial crisis in March) has – so far – been averted by the Fed’s actions as well as the governments titanic budget deficit pandemonium since the time it should have been occurring, late 2022 to early 2023.
But despite record increases in interest rates, a looming commercial real estate disaster, skyrocketing bankruptcies, a heavily abnormal job market and many other phenomena, it has not. In fact, the lack of a US budget cap until 2025 and the unchecked spending bonanza will most likely keep GDP positive in 2024, preventing a recession … at least on paper.
Going into an election year, one is left to wonder for the reasons behind the narrative of the Fed which has in truth been confusing for much longer than just the last few weeks. I’ve long argued against the status of central banks as independent actors, and although there is no need to jump the gun and scream foul, I believe we should be careful to not naively underestimate how political events can influence central bank decision-making.
The Fed chairman of course dismisses any speculation towards such ends, saying that grand actors such as himself “don’t think about political events”. Be that as it may, Powell ‘blinked’ prematurely according to his own standards, which were until recently more or less akin to anything that’s necessary to bring inflation to 2%. Furthermore, the Fed has played a game of sidelining food, energy and a host of other prices in their inflation rate calculations, skewing the numbers. To what end, and why? Well, I can think of a number of reasons. Let me start with the elephant in the room – a tap on the shoulder to stimulate the economy and markets and lift public sentiment for the incumbent regime?
Sounds far-fetched? I believe the last few years have shown us that we’re way past the point of believing that such things are impossible.
But where do we go from here? What if the Fed’s premature loosening restarts the very inflationary pressures Powell warned once against, in his own words “History cautions against prematurely loosening policy“?
Food for thought.
