Powell boxes clever.... but the same questions remain

 

ref :- "Treasury Demand Shows Resilience as Fed Signals Bond-Buying Pullback", Wall Street Journal, Markets

It was a public holiday in these parts yesterday so excuse us if we're a bit late on parade in identifying whether anything came out of Fed Chairman Jay Powell's speech on Friday that taught us anything that we might not have assumed beforehand. The short answer to that is .... "No". 

The likely plan is to begin tapering bond purchases sometime later this year, though exactly when, and on what scale, remains unspecified. Regarding the two cornerstones of Fed policy-making, Mr Powell acknowledged that employment growth continued on a strong upward path but was patchy and uneven (it usually is during recovery from recession), and reiterated the belief that the forces that have pushed inflation to unsettling levels were transitory. Plainly, faith that the supply chain issues that are behind much of the spike in prices will ease by early 2022 is still firmly intact, though some would argue that such a view is assuming quite a lot.

Mr Powell also reminded the more twitchy amongst his global audience that there was a big difference between scaling back asset purchases on the one hand and raising interest rates on the other, and that there was still a long way to go (particularly with regard to employment) before one could contemplate starting out on the latter course. All in all, and as if this was a regular occurrence, as statements about tapering go this was a pretty dovish one. 

So who liked it? Well, the markets certainly did. Stocks have yet again been posting record highs and bond yields have fallen (and bond prices risen). The yield on the 10yr Treasury is about 5bp lower than it was pre-speech, and traders obviously liked what they heard about interest rates enough to push the 5yr yield down almost double that. Obviously, even if Mr Powell's speech contained few surprises there was relief amongst investors that the Fed was not adapting a more aggressive stance. There's also a suspicion that we've all been talking about tapering, and the ultimate inevitability of it, for so long that the markets have developed a certain indifference to the issue  --  as long as the process is gentle and gradual, that is.

Which brings us to who didn't like it..... As we saying last week, there is a considerable body of opinion that holds that the longer the Fed holds off from taking action, particularly with inflation in mind, the more aggressive they'll have to be in the future. Whether investors are adopting a built-in acceptance of a gradual tightening of purse-strings or not, the likelihood is that harsher clampdowns would be very damaging to markets (in the short-term at least), and not much fun for anyone else either.

On the subject of who might approve of the the Fed's plan or otherwise, we would also nudge you towards "Powell Takes a Victory Lap" in the WSJ's Opinion section. It points out that Mr Powell's "softly, softly" approach will have gone down well in the White House. Now let's be perfectly clear here .... we are NOT suggesting for one moment that Fed policy is being shaped in any way by either personal or political considerations. If some might suggest that Mr Powell has demonstrated hitherto unrecognised political acumen, we would merely say that it is perhaps fortuitous that his approach might meet the approval of Mr Biden at a time when the President is considering whether to re-appoint the Fed Chairman or to look elsewhere.

It is more than likely (we hear) that Mr Powell will get the nod, not least because Mr Biden will be keen to re-adopt the practice of new incumbents re-appointing the Chairman put in place by their predecessor as President  --  a practice like so many others abandoned by Mr Trump. It also doesn't hurt if the Chairman votes for the other party (Mr Powell is a Republican, though certainly not a rabid one). The main opposition to such a move comes from progressives in his own Democratic party, including some of the well-known heavyweights in that group. They are not at all keen on Mr Powell's plans to roll back some.... rpt some.... of the regulatory legislation imposed on financial institutions since the financial crisis. It's worth keeping an eye on since the appointment of an alternative Chair more to the liking of the progressives  --  Lael Brainard, say  --  would not be market-friendly.

And since we're rabbiting on about any interaction between the Fed and politics (supposed or otherwise), there's one more thing you might want to file away and ponder from time to time. It is not overtly part of the Fed's mandate to address such politically contentious issues as growing inequality in the US ( it's a global problem, of course). But the ultra-easy monetary policy that the Fed has been forced into adopting has widened the gap between rich and poor. Such a policy inflates asset prices that almost by definition benefit the wealthy, and while the Fed maintains near-zero interest rates in the hope that consumer prices will soon return to acceptable levels, the galloping inflation that they allow most hurts those who can least afford it. 

It's a very difficult conundrum to solve, for sure..... but notwithstanding banking regulation, if you're looking for an area where one might expect the Fed to come under political pressure, that would seem a good place to start.