Wednesday’s FOMC release and the Jerome Powell press conference provided the market with enough ammunition to power even higher and send the DOLLAR lower. There was NOTHING hawkish about the FED decision regardless of the conclusions drawn from the ridiculous forecast from the SUMMARY OF ECONOMIC PROJECTIONS, which have as much value as teats on a bull. The SEPs have been never met in all the years the FED has released them as “quality” forecasts. Why did the market resolve to take a DOVISH view?
1. In response to Bloomberg’s Rich Miller about extending duration: There is no need to as of now because
In answer to Rich Miller of Bloomberg question about extending out duration: There is no need to as of now for the vaccine is on the way just don’t know its impact. But Powell warned there would be no specific numbers as to what would get the FED to change course but Chair Powell reiterated that it will be driven by MAXIMUM EMPLOYMENT. This means that many of lower-end service workers are back to being gainfully employed and as Powell maintained. THAT IS A POWERFUL MESSAGE.
The FED takes its role as the Ministry of Social Justice seriously, through no fault of its own but rather the inability for Congress to act. The market was also advised that any TAPERING in the PACE of ASSET PURCHASES would have advance notice unlike the 2013 Taper Tantrum ordeal under Ben Bernanke.
2. In response to a question from FOX BUSINESS about duration: Chair Powell noted that 10 million people who lost jobs and may lose their homes, as well as the need to keep financing small business owners in need of cheap loans so they can continue operating their life’s work (so the need to remain lower for longer).
Now I’m left wondering why the FOMC just didn’t immediately entertain extending out the duration of its asset purchases. Hey Jerome, what are you afraid of? Many central banks are already exercising Yield Curve Control (YCC). The ECB is doing it in an unusual fashion by crushing the yields on its weakest members. For example, the Italian and Greek 10-year yields are around 55 basis points. The Japanese, Aussies, Brits are all involved in YCC so why delay implementing the Brainard playbook?
3. Powell also fielded a question — discussed a multiple times in NOTES FROM UNDERGROUND: Why should they be buying state and muni debt issues? Powell noted that there has already been a loss of 1.3 million jobs, mostly in education, as states and local government lay off workers in response to revenue shortfalls. What he didn’t say is that there is a greater fear of more layoffs having a drag on the economy, especially as many of these workers are higher wage earners then the lower rung service workers. He noted that the FED was monitoring this situation closely.
4. For all of us global macro analysts, Chairman Powell made a very interesting point: The FED is in no HURRY to raise rates or begin TAPERING because there are SIGNIFICANT DISINFLATIONARY PRESSURES AROUND THE WORLD. I might agree with Powell but it is of great interest to hear a FED CHAIR worry about global price pressures. In my view, this drove a STAKE THROUGH THE HEART OF THE FED’S BELOVED PHILLIPS CURVE. My criticism of the curve has been that it is a domestic centered model while capitalism is global as the flow of capital seeks to find the lowest cost labor pools, keeping a lid on wages.
In citing this, Powell went out of his way to note the FED wasn’t worried about TRANSIENT INFLATION in some prices because this is not like the 1970s where a 6% annual increase led to a 6% increase in all prices the following year, promoting a cycle of ever higher prices. What Powell didn’t explain was to WHY. Private sector unions have been decimated by the flow of money around the globe seeking cheap labor, which has DESTROYED private sector negotiating power.
The collapse of the Soviet Union and rise of China freed hundreds of millions of workers to join the world economy and compete for jobs. It seems that the FED is aware that the rise of India will bring even more workers thus giving credence to my view of NEHRU not NAIRU. The FED is bent of lower for longer.
The Fed also released an addendum statement about extending the DOLLAR SWAP LINES to the central banks in need of DOLLARS last March when the U.S. DOLLAR SOARED IN RESPONSE TO FEARS OF A GLOBAL DEPRESSION brought on by COVID. The DOLLAR is currently making multi-year lows so what is the need to extend this special program except to allow the world to know THE WINDOW IS OPEN. That’s truly a statement of LOWER FOR LONGER.
In the 24 hours post-meeting, the markets have responded with an equity market rally, a large appreciation of the precious metals commodity prices — now at the highest level since mid-February — and most importantly, a sizable selloff in the U.S. DOLLAR. Now, if the FED were to actually announce any ostensible YCC look for these outcomes to continue in a major momentum move. LOWER FOR LONGER to combat incipient global deflation doesn’t appear except in the bowels of the FOMC. Do you see what I see?
Tags: Federal Reserve, FOMC, FX swap lines, inflation, Jerome Powell, U.S. Dollar, yield curve control
December 18, 2020 at 8:47 am |
[…] LINK HERE to the Blog Post […]
December 18, 2020 at 9:39 am |
Having grown up on a farm in rural northern Illinois, I believe the analogy is: Like teats on a boar
December 18, 2020 at 1:27 pm |
Yra,
Powell indicated he’s going to turn the FED into a mini EPA Agency and fight Global Warming.
How do think the FED will implement this self endorsed mandate? How can any of this new FED+EPA be legal if it’s not mandated by Congress??
December 19, 2020 at 6:20 am |
The Fed should come with a warning label. Like the ones we have on cigarette packs.
This institution may cause: price distortions, foreclosures, job losses, divorces, malinvestents, bankruptcies, bubbles.
So as I understand it, the “plan” is:
1st: we shoot for full employment while prices are rising.
2nd: we achieve full employment.
3rd: wages rise (because of full-employment) people can afford everything they need.
And voila, we have achieved our goal.
The period I’m concerned about is the in between. People will not just “wait around” for their wages to rise. Populism is the safety valve that will let out the steam prior to wages rising.
December 20, 2020 at 9:27 pm |
Pierre—i say this with great respect–your yellow vest is back from the cleaners.and you have the scenario correct but if inflation rises so much the better as workers receive illusionary gains and debtors get relief generating the next surge in demand–hopefully
December 21, 2020 at 6:25 pm
Yra I never doubt your sincerity, Thank you for affirming my convictions.
As we speak a new COVID stimulus package is being rolled out, illusionary gains coming our way.
By extending out the eviction moratorium and issuing stimulus checks we are not yet ready to March on Washington.
I will keep mon gilets jaune in my closet for now.