Notes From Underground: Powell, Lagarde and Payrolls, Oh My

It was the week that was as three main central bank interest rate decisions from the FEDERAL RESERVE, BANK OF ENGLAND and EUROPEAN CENTRAL BANK rocked the markets. There is more to follow Friday morning as the vaunted employment data will be released. The market is expecting 190,000 jobs created, a 3.6% unemployment rate, a 34.4-hour workweek and a 0.3% gain in average hourly earnings. After all of the central bank-induced volatility that last data point carries little weight unless it shocks to the robust economic upside.

If the unemployment rate fell too much — to say, 3.3% — or AHE soared above 0.7% it would send bond yields much higher, reversing the recent sizable rally in global bond prices triggered by central banks preparing to “pause.”

On Wednesday, all asset classes soared as Chair Jerome Powell was far more dovish than many anticipated as Powell invoked the word disinflation many times. As Peter Boockvar and I discussed under the auspices of Richard Bonugli in the latest podcast, Powell is a trained high-level attorney who knows how to use his words. Using disinflation once to describe the FED‘s guidance could have been an error. Several times is a signal.

Why did the FED chair try to move the market into a softer posture even as the financial conditions indexes have all been loosening? My conjecture is that there is more dissension in the FOMC then the unanimous vote indicates. If there is dissonance within the US CENTRAL BANK about the desire to increase unemployment to slow demand it will be the most economically vulnerable to pay the price. Would Lael Brainard, Lisa Cook, Philip Jefferson, Austan Goolsby, Susan Collins and Mary Daly sit quietly for this social outcome?

Speaking of central bank dissension, the Bank of England raised its lending rate by 50 basis points but the vote was 7-2 with the dissenters opposed to an increase. Following the BOE, the ECB raised its target rate by 50 basis points but they don’t publish the vote.

President Christine Lagarde always explains the mood of the meetings, describing how lively the discussion was in the determination of the policy outcome. In the last 13 months the ECB press conference has revealed that Lagarde has been under intense pressure as she has to contain the hawkish desires of the Hanseatic Five, who want to slay the demon of inflation far swifter than then many EU nations could tolerate.
Four weeks ago, Dutch Bank President Klaus Knott — and a monetary hawk — revealed in a Financial Times interview that more than a third of the ECB members wished for a 75 basis increase rather than the 50 that was approved. Lagarde is not able to do an aggressive QT program for fear of fragmenting the EU sovereign debt market so she stated yet again on Thursday: “Main TOOL FOR ECB IS INTEREST RATES.” The ECB president has to get the hawks to buy in to consensus by promising more rate increases.
Lagarde said, “WE INTEND” to raise 50 basis points in March, making sure the media understood INTEND to be a strong word. In response to higher yields and limited QT, ITALIAN BTPs DROPPED 40 BASIS POINTS. This subsided fear of fragmentation in EU bond markets spurred the DAX and EURO Stoxx to approach the highs made in 2021.
Most of this BLOG is discussed in depth in today’s PODCAST. Enjoy as it’s well worth the price as we try to keep inflation in place.
Click here to listen to the podcast.

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4 Responses to “Notes From Underground: Powell, Lagarde and Payrolls, Oh My”

  1. Blacklisted Says:

    Can you please explain how raising rates will bring inflation down to 2%. Will your response consider who the largest borrowers are, and whether their spending is impacted by rising rates? Also, how does raising rates help supply?

    • Yra Says:

      blacklisted—Powell told us three meetings ago or maybe more the proof is in crushing demand and that is what the FOMC tries to accomplish by raising rates to a level high enough to curtail demand –less demand equals more supply in a macro sense not micro–if you destroy enough wealth demand will collapse –see 1931 for proof and maybe we can buy the merchandise mart for $6 million dollars or all those ferraris for 15 cents on the dollar for wealth destruction is certainly another way to do portfolio balance channeling in a reverse way to QE

  2. ShockedToFind Gambling Says:

    NFPs were down 2.5 Million before seasonal adjustments. A 3 million add on seasonals makes no sense in this economy when employers say they are doing everything they can to hold onto employees.

    The household survey also had a huge add on a “population adjustment”……..these 2 adjustments had nothing to do with the State of the Union speech..

    • Yra Says:

      Shocked—-I would advise everyone to read the latest output from Dean Baker at the CEPR—it deals with the jobs issue you discuss and probably resulted in the NYT editorial yesterday about wages which I have not read but have heard much about

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