Notes From Underground: Wow Unto Chair Powell

The previous blog post about President Lagarde painting the FEDERAL RESERVE into a corner OUGHT to be revealed tomorrow as there is expected to be no change in FED policy and I believe that Chair Jerome Powell will do his best to pose as dovish as possible. If there is a CHANGE it will be in the mix of the QE as the SOMA will be moved to cut MBS purchases and replace mortgages with longer-term treasuries.

The purchases of longer duration U.S. debt would probably lead to an initial flattening of the curve but I advise caution to see how long that trade would hold. The last FED meeting led to a dramatic flattening of the 2/10 and 5/30 curves as the markets sold the belly of the curve in a false bow to FOMC hawkishness. The market may interpret a shift to purchasing of longer-term Treasury debt as yield curve control (YCC). Be patient and let the algos drive the market in reaction to headlines.
Following President Lagarde’s press conference, we at NOTES warned that the remainder of the summer would be filled with news from the ECB dissenters. On Tuesday, Robert Holzmann of the ECB and Governor of the Austrian Central Bank was interviewed on Street Signs Europe. CNBC ran the chyron, “ECB’s Holzmann says central bank’s new policy guidance was ‘a step too far.'”

Lagarde jumped too fast with the forward guidance on lower rates for longer. Holzmann suggested that the summer was no time to proceed on such an aggressive policy and they should have waited to see how the PANDEMIC proceeded and of greater interest Holzmann advised waiting for the FED to announce its intentions. It appears Lagarde wished to get out ahead of the hawks, thus putting Powell in an awkward position. More will be heard from the other agent provocateurs — Knott, Weidmann, Wunsch. The German elections will be indicative about how concerned voters are with the ECB and inflation in Germany.

***The first question to Powell from the press OUGHT to be: Chair Powell, you and many others including Treasury Secretary Yellen have maintained that REAL unemployment is close to 9.5%. The concern of many Fed regional presidents is inflation of 5%. Which one of these mandates carries the most weight in your decision today?

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13 Responses to “Notes From Underground: Wow Unto Chair Powell”

  1. Dominic Siciliano Says:

    Great Question for Powell!

  2. David Richards Says:

    Because everyone in Europe soon begins their enviably long summer vacation for the rest of the summer, won’t the ECB dissenters be moot and heard only by the crickets?

    I think the honest answer for Powell’s first question would be that what carries the most weight with the Fed is financing the US Treasury and government? That implies strengthening its policies of financial repression to reduce gov’t interest expenditures and real debt, and also to push up stock/asset prices to facilitate gov’t tax receipts.

    • David Richards Says:

      … therefore Powell would cunningly reply that unemployment carries more weight in Fed policy, not inflation.

      In fact, on account of the untenable US government finances, I suspect that Powell and more importantly Yellen want more inflation so that real treasury yields are more negative and real treasury debt falls, but of course the Fed could never say so.

  3. kevinwaspi Says:

    Second question:
    “Mr. Chairman, in light of the past 13 years of continuous Fed “extraordinary measures for extraordinary times”, how successful would you say these policies have been in helping Americans, who do not own financial or real assets, you know, the majority of Americans?”

    • Yra Says:

      Professor—great question as it is jam packed with nuance for the Minister of Social Justice

    • Arthur Says:


    • David Richards Says:

      Hasn’t the bernank and/or jaypow already repeatedly said you should be thankful that your kids have jobs on account of Fed policies – a smashing success, lol. Four more years!

    • David Richards Says:

      3rd question: “Chair Powell, you and others including Treasury Secretary Yellen have maintained that REAL unemployment is close to 9.5%. What do you maintain the REAL rate of consumer price inflation is?”

  4. Asherz Says:

    Powell’s real answer to the first question, which would never be stated:
    “It is our third mandate that guides our decisions, that is, to keep the markets bubbling “.

    However truth be told, the casualties are the destruction of the dollar and to Kevinsaspi’s question, the obliteration of the life savings of the prudent American savors in favor of the spenders and debtors.
    Price discovery is long gone as interventions have replaced the invisible hand.
    At the end Capitalism will be blamed and central control of the economy will replace it with a loss of the freedoms we have enjoyed until now.
    The 1913 creation of the Federal Reserve will have turned out to be the beginning of the end of our noble experiment.

  5. Yi Says:

    Hi Yra,

    Currently Treasury paused selling new bond notes due to debt limit issue. How can this affect Treasury interest rate outlook and repo/reverse-repo market?


    • Yra Says:

      Yi—it makes the shortage more severe —Friday the Reverse repo saw in excess of of 1 trillion but the 5 basis points on rrp keeps it from negative

  6. The Bigman Says:

    Yra, just listened to your FRA audio with Russel Napier Best to date IMHO I love his term Magical Money Tree = MMT Question: I agree with him as to bonds being a means of theft but wonder what you think of TIPS as a place to park cash? Thanks TBM

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