Pity Jerome Powell.
The Fed Chairman, who as a reminder has been at his job for less than a year, inherited a legacy of poor choices and even worse consequences. As One River Asset Management correctly wrote in its weekly note, Powell’s predecessors left him with mission impossible: the Fed chair faces a dire dilemma of on one hand either continuing the failed policies of the past decade that have resulted in the “everything bubble”…
… or biting the bullet and at least trying to stick with the painful “renormalization” pathway of rising rates and shrinking balance sheet that has already resulted in the biggest market drop since the financial crisis, and has reportedly promptrf calls by president Trump for Powell’s head.
Only it’s not just Trump: so habituated is the market to the constant presence of the Fed’s training wheels, that one week after the op-ed by prominent “hawks” Stanley Druckenmiller and Kevin Warsh urging the Fed to halt its tightening cycle, a chorus of cautions has emerged on Wall Street, warning that the Fed has done a “policy error”, while calls that the Fed may have gone too far in raising borrowing costs are gathering momentum, with some going so far as accusing Powell of being at “peak error” right now.
Courtesy of Bloomberg, here’s a collection of those of who have been sounding the alarm on Fed policy beyond Trump:
Priya Misra, head of global rates strategy at TD Securities LLC in New York
“I think it’s a notion of a Fed policy mistake. The Fed is signaling continued hikes, which is a mistake. The market was already worried about that. Unfortunately the Fed didn’t alleviate many of those fears.”
Scott Minerd, chief investment officer at Guggenheim Partners
“As the curve keeps flattening on us, it’s telling us that monetary policy is being too restrictive and that we don’t have enough reserves in the system to stimulate the economy.”
Donald Selkin, chief market strategist at Newbridge Securities, in an interview earlier this week
“The issue is whether the Fed is providing tough love to the market. He’s saying everything is great, the economy is doing great, but the market, which is forward looking, is dropping. Something’s not right. The Fed has made many policy mistakes in the past. I guess when the fourth quarter earnings come out, whether there’s lower guidance, that’s what everyone will look for.”
David Bianco, chief investment officer at Deutsche Asset Management, in a note to clients
“The Fed must make the right decision for the economy, not its credibility or autonomy. The ability to raise interest rates is an awesome power and no hike should be made without careful consideration of the risks to growth, wealth and the jobs at stake. This new Fed Chair and committee must stop treating higher rates as no big deal and more clearly answer these questions to regain market confidence: What are the benefits of further hikes? What are the risks? Which inflation indicator gives you the most concern?”
Gene Tannuzzo, deputy global head of fixed income for Columbia Threadneedle Investments
“I think they’ve done bit of a disservice by trying to minimize the impact of the balance sheet that’s going on in the background.”
Jim Bianco, president of Bianco Research LLC in Chicago
“The Fed sees the market is solidly screaming at them ‘wrong policy’ and they are trying to understand that. Not Trump. And if they do not get the messaging to the markets right, stock go down further and Wall Street will turn on Powell.
Michael Churchill, research analyst at Churchill Research
The Fed is “probably at peak error right now,” he wrote in a note. “The Fed’s intellectual and policy posture is so bad now that it can probably only get better. The Fed’s errors are easy to demonstrate, which makes it likely they will be rectified sooner rather than later.”
Of course, the simple truth is that it’s not Powell who is at peak error: Powell is merely on the receiving end of a late-cycle expansion which after initially levitating thanks to trillions in easy monetary policy, was artificially boosted for the past two years with the tailwind of Trump’s fiscal stimulus which however is not only fading now, but leaving the economy facing the pernicious consequences of accelerating (and delayed) wage growth and a labor market in which there are simply not enough vacant positions, while stocks are pricing in the tighter financial conditions that accompany central banks soaking up liquidity.
The result is that Powell is now blamed for the sins of his predecessors, and that his forced departure would only make matters worse sending stocks crashing even more, ultimately culminating with Trump becoming the fall guy for years and decades of disastrous monetary policy which started with Alan Greenspan’s bubble blowing ways and extended not just with Bernanke and Yellen, but spread globally into China’s unprecedented credit expansion as well as the ultra-easy monetary policies of the ECB, BOE, SNB and so on.
Alas the party is now ending, whether with or without Powell, and the only hope Trump may have to kick the can a little but longer and have the Fed launch one final QE episode, is to crush the market, unleashing another round of ultra-easy policy. Considering the overnight events, Trump may have finally figured out that to save the market, he will first have to destroy it.