Well, if you were looking for something definitive or otherwise market-moving out of new Fed Chair (and latest person who wishes they hadn’t accepted a Trump appointment) Jerome Powell, you didn’t get it in his prepared remarks for the ceremonial swearing in or, as it’s known in this administration, the ceremonial blood oath/loyalty pledge.
If you’re out of Ambien, you can read the text of his remarks here, but suffice to say this is all we got on markets:
We will remain alert to any developing risks to financial stability.
Considering the market literally crashed the very day Powell took the oath of office and considering that crash was directly related to not one (the worry that irresponsible fiscal policy piled atop an overheating economy will worsen the bond selloff), not two (the short vol. ETP blowup suggesting there is still an overriding tendency for everyone to ignore obvious risks when creating vehicles for speculation), but three (evidence that the selloff was at least to some extent exacerbated by forced deleveraging from model-driven, rules-based systematic strategies) “risks to financial stability”, one hopes he’s on high “alert”.
Sarcasm aside, Powell obviously wasn’t going to use his swearing in to talk about Seth Golden (although how funny would that have been?) and the risks posed by quant funds, and it’s important to remember that the proximate cause of the recent turmoil is rising yields or, more to the point, the rapidity with which yields have risen.
This is the tragedy of Jerome Powell’s situation. He’s taking the reins at a time when common sense on fiscal policy is being subjugated to the MAGA delusion.
On Monday, as Trump unveiled his budget and talked up his infrastructure plan (which, in case you were wondering, is “getting great reviews“), Credit Suisse was out upping their projection for Fed hikes in 2018 in the latest example of everyone trying to price in how Powell will respond to what CS described as “poorly-timed” fiscal stimulus.
Literally everyone (but Trump) knows that heaping more expansionary fiscal policy atop a late-cycle dynamic less than two months after passing an unfunded tax cut is virtually guaranteed to overheat the economy and force the Fed to choose between acting aggressively hawkish or falling woefully behind a curve that will invariably bear steepen on them if they stick to a more gradualistic pace of hikes.
Even Abby Joseph Cohen can’t spin this in a positive light. “Government policy coming out of Washington, to my eyes, is not supportive of sustainable intermediate and long-term economic growth,” she told Bloomberg on Tuesday.
The problem here is glaringly obvious. Steady-as-she-goes growth is not only not acceptable under MAGA, it’s explicitly forbidden. There is nothing “great again” about growth that’s less spectacular than it’s been in the past. Growth that’s lower than yesteryear is the exact opposite of “great again” if you equate “great” with growth.
So come hell or high deficits, Trump is going to restore that bygone era of American “greatness” and in his Simple Jack world, that’s as “easy” as tax cuts and fiscal stimulus. And you know, if we weren’t where we are in terms of the cycle and we weren’t nearing what certainly looks like a peak in economic momentum, that might be fine. But we are where we are and so what he’s doing is going to juice things further in the short-run at the expense of the medium- and long-term. Of course that may make sense for Trump, because at this point, he probably figures that by the time the chickens come home to roost, he’ll either be in prison or hiding in a cottage outside of St. Petersburg under the protection of the Kremlin.
Anyway, circling back to poor (and by “poor” I mean in terms of circumstance, certainly not in terms of his massive back account) Jerome Powell, he’s going to quickly find himself in a situation where he’s getting pressure not to raise rates no matter what happens to inflation and no matter how hot the economy is running.
I don’t think everyone fully appreciates how soon-to-be precarious this is going to get for ol’ Jay. Just imagine for a second that Trump’s myopic tax cuts and stimulus end up getting him the economic sugar high he’s after and just as he’s shrieking about it at a rally, the Fed hikes rates citing an overheating economy. Trump would go fucking crazy. He would never let that stand. I’m telling you, he’s going to turn into Erdogan when it comes to rates.
Do me a favor and read the following quotes from a speech Erdogan made back in November when inflation was spiraling out of control in Turkey and the lira was plunging:
They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered. Results speak for themselves.
We will solve this, things can’t go on like this.
Who does that sound like to you? I mean besides Erdogan.
If you read the accompanying color from Bloomberg it’s even easier to imagine Trump going this route if Powell gets too aggressive. To wit:
Erdogan vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high.
It’s almost too perfect a parallel. Before you know it, “the swamp” and the “American deep state” will include the Fed governors.
Anyway, don’t say I didn’t warn you. But also, don’t forget to laugh when this starts because again, the bright side will be that the tweets and the anti-Fed campaign rallies will by nothing short of hysterical.
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