Notes From Underground: The Powell Fed Turns Transient From Transparent

May brought another Federal Reserve meeting that sowed more confusion. Maybe there is such a thing as too much transparency. The FOMC statement revealed the Fed thought “growth of household spending and business fixed investment slowed in the first quarter.” Coupled with this analysis was the OUTLOOK that “inflation compensation have remained low in recent months.”

In addition to the statement, the central bank also lowered its interest on excess reserve, or IOER, rate by 5 basis points in order to bring the fed funds rate back toward the middle of the range. As a response to the adjustment, the May FED FUNDS contract actually gained 2 basis points on the day. It was the only short-term instrument to close higher on Wednesday after Chairman Jerome Powell’s press conference. (The rest of the asset classes rallied in response to a somewhat dovish Fed.)

This price action was reversed as FED Chairman Powell began his press conference. He revealed that although recent inflation data was tepid the FOMC perceived weak price action to be TRANSITORY. Powell said the economic and financial headwinds from weak growth in China and Europe, the negative effects of Brexit and drag from trade frictions were moderating. The FED was deemed to be leaning HAWKISH, which completely wiped out the post-statement rally.

The market had been leaning toward a softening FED stance as measured by the recent price movement in the 2/10 and 5/30 U.S. yield curves. The perceived shift in the FED back to a HAWKISH BIAS due to transitory price movements easily forced the doves from established positions. Even the beloved S&Ps, DOW and NASDAQ put in downward reversal days.

The bottom line for this analyst/trader is the FED remains challenged with its previous problem: How does it navigate an independent monetary policy when the world’s central banks are continuing to engage in QE in the hope of keeping their currencies weak against the U.S.?  The White House is going to continue to pressure the FED over restrictive monetary policy causing too STRONG A DOLLAR. Any hope of President Trump getting soft-money advocates on the FOMC was dashed Thursday as Stephen Moore’s name was withdrawn.

***On Friday we get April jobs data, for which consensus is 185,000 net nonfarm payroll with a 0.3% gain in average hourly earnings. That follows very weak 0.1% from March. Powell maintains that the FED can control the SLACK part of the labor situation but it does not seem that a tight jobs market is leading to a large gain in wages, challenging the relevance of the Phillips curve. The question remains for the FED as to why the Phillips curve is so flat. It seems that the free flow of global capital in search of low-cost labor has impeded the transition signals of the FED‘s beloved signal.

So then what data will really guide the FED now that the presumed impact of a tight labor market that has predisposed a VIGILANT FED. Regardless of the theoretical backdrop, be patient with the headline data and let the algos provide price opportunity. The market is geared for a strong number because of the ADP release on Wednesday morning (275,000 private sector job gains versus a predicted 181,000). The AHE will be the most critical so patience is demanded for the best trade location with the least risk.

Then later that morning Fed Vice Chairman Richard Clarida speaks on models, markets and monetary policy at Stanford University’s Hoover Institute. Clarida has been the front man for the Fed’s response to international concerns about a hawkish Fed stance. A too-tight FED has severe repercussions for a global financial situation dependent on DOLLAR funding. Listen closely for a more dovish position from Clarida at 11:30 a.m. EDT.

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10 Responses to “Notes From Underground: The Powell Fed Turns Transient From Transparent”

  1. Michael Temple Says:

    “What data will really guide the Fed……?”

    Powell can blather about labor numbers and PCE and deflators until the cows come home. What he is truly hostage to is……the S&P.

    Markets now wag the dog/economy.

    Personally, what will Powell do if EFF/IOER continues to widen?
    Continued widening, along with the interest rate differentials between NIRP currencies and USD will continue to keep the dollar bid.

    In my view, this is ultimately going to be the undoing of the stock market. Maybe not now, but sooner than later, as economic numbers continue to slacken. Did anybody notice that Chrysler threw in the towel and will no longer report weekly auto sales, instead moving to monthly numbers.

    Who does that when auto sales are strong?

    Yes, short term USTs sold off yesterday. But UST 2-yr is still 2.34%.

    Again, I believe all this Fed blather about what motivates them is simply CYA blather. Powell has essentially re-affirmed the Fed Put/Peg Of stock market values, even though that topic never came up. At the first sign of a stock market hiccup (not crash) the Tweeter In Chief will strike and UST yield curve will plummet once again in anticipation of another “fix/hit” by the Fed.

    Tomorrow should be fun to watch


  2. asherz Says:

    The withdrawal of Herman Cain and Stephen Moore is more than sad. They didn’t fit the mold. There were enough Republicans who are members of the swamp who torpedoed them (democrats will vote against almost any nominee). They threatened to bring some sense to the Fed that would begin to steer us away from the craziness of the Greenspan/Bernanke/Yellin and now disappointedly Powell, and the march to the precipice of the debt abyss. A trillion for infrastructure? No two trillion. How to pay for it? Details, details.
    I sure wouldn’t want to be in the Fed Chairman’s shoes. Whatever he will do will turn out to be wrong somewhere and the one standing when the music stops will be the next Herbert Hoover.
    Charleston, Charleston…watch those flappers go.

  3. David Richards Says:

    How about Kevin Warsh and John Taylor instead of Cain & Moore? They were good enough to be serious candidates for Fed Chair. Then punt Clarida; he’s not adhering to the congressional mandate.

    • yraharris Says:

      David—both would be too independent and strong for the Trump team—both good candidates and warsh is exceptional but he was passed over for his independence—we got Powell who they believed would be favorable to the White House agenda—the one that is ever closer to the Obama outlook—interesting that Dalio now believes we will come to some MMT–a disaster for it synthesizes fiscal and monetary policy .Maybe Trump should push for Draghi

  4. Chicken Says:

    I hear FED has unwound $580 B now, approaching the grandiose scale of published Pentagon budget levels.

    Imagine the magnitude of animosity created if the FED were to outdo the Pentagon!

  5. Trader1 Says:


    Pres. Trump tweeted he is looking at a $1T – $2T bipartisan infrastructure plan.

    If passed by congress how do you think the FED responds while at the same time being ‘boxed in’ by what the other Central Banks are doing? (all else in the economy being equal)

    Does the FED stay on hold and just let the yield curves just steepen??

    • yraharris Says:

      Trader 1–yes I believe the Fed stays on hold and Powell can be trapped by Trump as he pushes trade frictions with Europe further and harder—the FED should cut IOER soon in an effort to test the liquidity add that will result from lowering the IOER by a substantive amount—Powell is trapped either by Trump and Lighthizer or by other central banks–especially as wages are not the transient variable in the inflation discussion

  6. asherz Says:

    The inflation discussion should at this time not include wages, commodities but primarily focus on asset inflation. As has frequently been mentioned here, the dog is being wagged by the markets.
    We have had an overpriced, overbought and overvalued market for some considerable time. What will be the catalyst to prick the bubble?
    In 1987 it was the United Airlines LBO that broke down that brought on that crash (anyone still remember that)?
    Today can the break down of China/US trade talks cause the next tumult? Watch if these talks resume after the current posturing, and if not, keep this unexpected development in your crosshairs. This after recent rumors of a deal finalized this week. A China/ United States trade rupture will share an historical spotlight with Smoot- Hawley.

    • yraharris Says:

      Asherz—yes asset inflation OUGHT to be critical but the market’s cheer will not move the Fed—markets up good,volatility up bad–all hale higher asset prices as a positive barometer for the administrationand in the greenspan school–we don’t know a bubble until it pops and we are not in the nmandate of poppping unknown asset bubbles

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