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Markets Have A Message For The ‘New’ Chair

Markets Have A Message For The ‘New’ Chair

Jay Powell may celebrate today, having been renominated for a second term – bizarrely it took Biden almost a month to make the simple decision to extend his tenure as he fought constant complaints from the socialist wing of the Democratic party to appoint someone even more dovish – but markets are signaling to the former lawyer that he has little time to get going on their mandate.

As Bloomberg’s Ven Ram writes, with prices surging at the fastest pace in decades and inflation expectations running at the highest since the Federal Reserve Bank of New York started compiling the survey in 2013, there is already a chorus of voices seeking a faster pace of taper. From Governor Christopher Waller to James Bullard to Vice Chair Richard Clarida himself, there seems to be a growing recognition that the Fed can’t just wish for inflation to subside and twiddle its thumbs in the meanwhile.

All things considered, it’s hard to argue that at this stage of the recovery the Fed’s bond purchases are supporting the broader economy in any meaningful sense of the term –indeed, what was emergency medicine needs to be withdrawn with the passing of the crisis with just as much alacrity rather than feed bubbles and set us up for new problems down the line. And the way things stand, a faster pace of taper may not uncork extreme volatility given how term premiums are still in the doldrums. If anything, overnight indexed swap markets are already pricing two rate hikes by the end of 2022. In other words, given the Fed’s higher additional bar for raising rates, the implicit message from traders is that they don’t really care about the pace of taper.

So the question really comes down to whether policy makers, who are typically bold with their response when the economy is on the way down, have the courage to be equally symmetric in their response when we are well past a crisis. And that’s the first stern test of character the new Fed chair faces from the markets.

All we can add to Ram’s thoughts is that historically the central bank – for all the hollow talk about an Independent Fed – has been expected to facilitate the political plans of the ruling political party. As such, the proposed rate hikes will lead to howl of outrage among the progressives, and coming at a time when the US economy is rapidly slowing, could well spark the next recession…. setting up Brainard who is now next in line to control the printer.

As such the real question traders should be asking is not how fast the Fed will complete the taper or when it will hike next, but how big the next QE will be and what other assets the Fed will have to buy this time to preserve the wealth effect of its true owners. In other words…

Tyler Durden
Mon, 11/22/2021 – 14:45

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