Looking Past Powell

Jerome Powell's term as chair of the Federal Reserve doesn't end until next February, but the handicapping of his reappointment has already begun. A recent poll by the Wall Street Journal found that three-quarters of economists it surveyed believe Powell will be renominated by President Biden, but I would argue that the odds are at best 50-50, if not lower.

Powell has unquestionably been friendly to the financial markets, which counts in his favor on Wall Street, but that may be a detriment when it comes to the progressives who are likely to have the biggest voice in choosing the next Fed chair. Right off the bat, Powell checks off none of the boxes that progressives are looking for, and as he has shown since his inauguration, Biden almost never goes against what they want.

Let’s look at Powell’s negatives: He's a white male. He's a Republican. He comes from Wall Street. He's rich (although most people at this level are). Let's also not forget that Powell was nominated to his position by President Trump, which automatically disqualifies him in the eyes of many, never mind the constant barrage of criticism Trump leveled at him once he was seated.

Just the taint of being associated with the former president should be enough to make him unsuitable for another term.

More importantly, however, Powell has not publicly bought into the prized objectives of the left, namely using the Fed to further social policy (i.e., wealth redistribution) and climate change initiatives, asserting that those are political decisions better left to Congress. Continue reading "Looking Past Powell"

Don't Fear The Taper

Long, long ago, even before the 2008 global financial crisis, the world’s central bankers, including the Fed, shifted their focus from trying to fight inflation to trying to create it. As we know, however, that pursuit of the holy grail of 2% has taken more than a dozen years, and now that we appear to be there, and well beyond it, in fact, the Fed refuses to believe it.

Ever since the economy began reopening earlier this year, the U.S. year-on-year inflation rate has been rising steadily and strongly, well above the Fed’s 2% target. In May, the YOY rise in the consumer price index hit 5.0%, while the core index, which excludes food and energy prices, rose 3.8%. Looking ahead, it’s hard to see inflation easing anytime soon, given the trend in rising worker’s wages, which once on the books are going to be hard to pull back, especially given the dearth of workers relative to job openings. Prices are also rising due to strong pent-up demand that is far outpacing the supply of goods, due partly to the lack of workers.

Yet Fed Chair Jerome Powell continues to insist that this recent surge in inflation is “transitory,” a mere temporary reaction to the economic reopening.

Is he saying that because he really believes it, or because he’s worried what will happen if the Fed starts to turn down the juice, even a little bit, and with a fair warning? Continue reading "Don't Fear The Taper"

The Inevitable Rise In Rates

Consumer Price Index (CPI) Market Scare

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, and a robust housing market will be tailwinds for the big banks.

Financials

The prospect of rising interest rates coupled with fantastic earnings have propelled bank stocks to all-high highs. Citigroup (C), JPMorgan (JPM), Bank of America (BAC), and Goldman Sachs (GS) have appreciated to all-time highs. Rising interest rates in combination with the highly disruptive COVID-19 backdrop abating has served as the foundation for this move higher. The big banks responded and evolved in the face of COVID-19 to the real possibility of widespread loan defaults, liquidity issues, ballooning credit card debt, and stressed mortgages. To exacerbate these COVID-19 impacts, interest rates, Federal Reserve actions, yield curve inversion, and liquidity heavily weighed on the sector. Continue reading "The Inevitable Rise In Rates"

Put The Blame On Me

At least since the global financial crisis of 2008, Federal Reserve officials have, by and large, denied or downplayed the idea that their zero-interest-rate policies and mammoth bond purchases have artificially inflated financial assets even as the Fed is buying trillions – with a capital T – of U.S. Treasury and mortgage-backed securities markets and more recently corporate bonds. Now the presidents of a few of the Fed’s regional banks are suggesting that the Fed study whether its monetary policies are encouraging overly risky investor behavior.

Loretta Mester, the president of the Cleveland Fed, conceded that prolonged periods of low rates could incite “higher levels of borrowing and financial leverage, increased valuation pressures, and search-for-yield behavior.”

“While monetary policy that leads to a stable macroeconomy encourages financial stability, it is also possible that in an environment with low neutral rates, a persistently accommodative monetary policy could, in some cases, increase the vulnerabilities of the financial system,” she said.

Boston Fed President Eric Rosengren went even further, suggesting that the Fed “rethink” financial regulation – but apparently not monetary policy – to rein in speculative behavior. Continue reading "Put The Blame On Me"

Disconnect? What Disconnect?

Over the past few weeks, the financial news media has been marveling at what it calls the “disconnect” between stock prices and the economy. Economic and health statistics are likely to go from bad – 30 million unemployed in the past month, a 4.8% drop in first-quarter GDP, an 8.7% drop in retail sales in April, more reported coronavirus cases and deaths – to worse – a nearly 40% drop in GDP and around 15% unemployment in the second quarter, according to the Congressional Budget Office’s latest projections. Yet the stock market has blissfully regained about half of the 34% drop it sustained between mid-February and mid-March.

But is there really a disconnect? Does the economy – now largely controlled by the Federal Reserve and the U.S. Treasury Department – still have any correlation to what happens in the stock market anymore, and vice versa? Well, the answer is yes, but not in the way it used to. What’s happening is that as the economy goes deeper into the red, the more it prompts the government to pump in more money and for the Fed to intervene more in the financial markets. That is unquestionably good for stocks.

We have been in an environment since the 2008 financial crisis where the Fed has played an unprecedented activist role in the bond market and, indirectly, the stock market. That role has grown further under Chair Jerome Powell, who seems to believe it’s the Fed’s job to rescue equity investors any time stock prices correct, never mind what’s going on in the economy. Now that we’re in the middle of an economic downturn that makes 2008 look like a garden-variety recession, the Fed has put its monetary policy and quantitative-easing engines into Continue reading "Disconnect? What Disconnect?"