Notes From Underground: Waiting for Godot, or Waiting for Jerome?

President Donald Trump has had his issues with his own hand-picked Federal Reserve Chairman Jerome Powell. At one point there were even discussions about Trump attempting to demote the chairman if not “firing” him for failure to keep interest rates low enough to finance the massive budget deficits. The Covid pandemic, coupled with 2019’s Powell pivot, seems to have satisfied the President’s lust for negative REAL YIELDS as Powell is no longer the object of Twitter derision.

The U.S. central bank is in battle mode in its efforts to reach INFLATION levels that would lessen the stress on the massive build-up of public and private debt. Between Powell’s speech at Jackson Hole and Governor Lael Brainard’s appearance at Brookings two weeks ago sustained recent FED actions while revealing that the forward guidance will be directed at achieving at least 2% inflation and most probably higher for “far longer.” Powell and other FED voters have become parochial in their focus to get employment levels back to the pre-Covid level of 3.5%.

While the central bank has attempted to become more transparent to the average citizen via its “FED Listens” gatherings, they have generated greater concerns at the FOMC regarding the blight of Black and Hispanic workers who have been stuck at the bottom of the economic system for the last four decades — and until February 2020, were experiencing the best job market in 40 years. The FED has been clear that until these people are back in the labor pool higher inflation levels will be tolerated.

The central bank has relegated itself to ameliorating the problems caused by educational and economic inequalities. The problem will be at what cost to the nation’s financial status as inflation will just have to be the outcome for those with savings. That’s the ultimate hammer of FINANCIAL REPRESSION nailing the RENTIER class to the mast of social justice. It is Powell’s stress upon the loss as jobs “through no fault of their own,” which necessitates the need for JOBS over INFLATION.

As Congress continues to politic the next fiscal stimulus the FED‘s task is ever greater, SO NO CHANGE WEDNESDAY in the statement. However, we will see if the FOMC calls for radical fiscal stimulus in an effort to urge Congress to act.

The battle lines are drawn in the financial arena between those perceiving inflation versus many high quality analysts forecasting deflation. I take the FED at its word that the policy of average inflation targets allowing for inflation to be averaged over long time periods is paramount. The pursuit of JOBS is PRIORITY ONE.

Two questions that reporters ought to ask Powell at Wednesday’s post meeting press conference:

  1. Would a WEAKER DOLLAR help spur a faster realization of the inflation target as long with possible job growth? It certainly keeps downward pressure on the DOLLAR as U.S. REAL YIELDS remain among the lowest in the world. It is real yields that are the genuine cause of financial repression. The world’s reserve currency is seeking to question its status in a world seeking positive real yields.
  2. The second question would be a corollary: If you are successful in generating above target inflation and bond vigilantes begin putting upward pressure on long yields would the FED embark upon Yield Curve Control to thwart the will of the market? (Yes, I am aware the FED does not discuss the U.S. DOLLAR as that is the Treasury’s responsibility but FED must acknowledge the dollar’s impact on potential inflation.)

YCC is key for many asset classes. Any hint at YCC will put downward pressure on the DOLLAR and push the precious metals higher as the threat of ever greater financial repression scares global investors. How bad does the FED want to stimulate inflation and deal with the negative effects at a later date? Waiting on you, Jerome.

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13 Responses to “Notes From Underground: Waiting for Godot, or Waiting for Jerome?”

  1. Asherz Says:

    A Fairy Tale
    With the money spigot turned on, there are two buckets to collect the flow. One is capital investment which also creates jobs with money velocity accompaniment and can achieve inflation. The other is asset investment which buoys the markets and in recent times to manic proportions, with little money velocity, and low inflation except for assts.
    In the process the flow (currency) is being poisoned and the bucket overflows.

    He huffed and he puffed and then blew the house down.

  2. Michael Temple Says:

    Hello Yra
    While all eyes generally fixate on DXY as the measure of USD strength/weakness, it is important to remember that the EUR comprises 57ish% of that index.

    Asian currencies are quietly gaining on the USD with both yuan and yen nearer to their y-t-d highs rather than lows.

    Gold stubbornly above key support of $1950 and US 10 yr real yield still NEG 102 bp.

    With DC on hold in terms of additional stimulus, the burden falls on Mr Powell, especially if Covid shutdowns lie ahead as seems to be the case in some other countries as autumn approaches

  3. Michael Temple Says:

    Hello Yra
    No YCC and so the PMs have no bid.

    On to the next

  4. Recoba Bacci Says:

    PMs vulnerable to pullback until we get more government loan guarantee programs or YCC

  5. Bellino Says:

    With the FED ” lending money” ad infinitum to the RENTIER CLASS,
    they need not fear any nails on their splenderous 200 foot yachts.

  6. Pierre C Says:

    Does anybody else think the drop of the USD against the Yuan is orchestrated?
    And if it is, would the BIS or IMF have anything to do with it. They have talked, in the past, about the need to rebalance the trade surpluses.between these two countries.

    • yraharris Says:

      Pierre—too conspiratorial and difficult in this environment.I am more in the Pettis camp of YUAN signifies an attempt to rebalance the Chinese economy to a domestic orientation although recent trade data makes this task difficult

  7. Arthur Says:

    Blackrock: Preparing for a higher inflation regime

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