Tapering Conversation Heating Up, Powell’s Prospects
The Jackson Hole summit has become one of the most important economic summits in the world. Many expect that this hallowed event with humble origins may be the long-anticipated venue for the Fed to communicate their monetary policy plans to the American people. In 1982, the nascent event was chosen to be put in the then very remote town of Jackson Hole, Wyoming because of a unique vulnerability its organizers attempted to exploit to ensure Federal Reserve Chairman Paul Volcker’s attendance; his deep affinity for fly fishing.
The divide on the Board has been increasing. Seven Governors want to taper much earlier than the other thirteen. St. Louis Fed President Jeremy Bullard is becoming one of the leading public-faces of this faction. He has been stating publicly that there are many reasons to be more cautious and not assume the transitory inflation narrative is a ‘sure-thing.’ Recent data releases have certainly gotten his viewpoint more attention, particularly since many Fixed Income investors who have repeatedly lost money trying to time bonds always love to have someone other than themselves to blame. Despite this dynamic and the sometimes-virulent anti-Fed skepticism encountered on various corners of Wall Street, the hawks are gaining credibility. We dove deep into the inflation numbers in last week’s Wall Street Debrief and ultimately more data will be needed to see who is right.
The other side of the argument has steady cheerleaders from folks like New York Fed President John Williams and Chicago Fed President Charles Evans. Evans recently said, despite the litany of smoking inflation numbers, he is still concerned whether or not the Federal Reserve will be able to meet its inflation target. When you get such divergent public views from representatives of various developing policy factions within the Fed you can probably assume some public jockeying for advantage in the actual discussions of what policies will be implemented amongst the Board’s members is occurring.
The doves also have an additional arrow in their quiver that some too glued to the discussion of the day may miss. They always have the ability to raise rates much faster than the markets today assume (more accustomed to incremental and steady actions) if they do indeed find conclusive data that they are behind the curve. This fact, known to the members better than the public, may be why the inflation hawks haven’t gained more prominence or power. It seems more cautious to let the accommodative policy ride and clean it up forcefully and quickly if unanticipated consequences arise. Of course, the risk of a policy error given the anomalous environment and plethora of risks is probably relatively higher than any time during our lifetime (aside from perhaps 2008).
Discussions have been prevalent this week as to Powell’s prospects for renomination. It is almost an established tradition of good and impactful Fed Chairs to receive re-nomination of the opposite party that appointed them. For example, Ronald Reagan kept Paul Volcker on. Bill Clinton kept Alan Greenspan on and of course most recently President Obama kept Ben Bernanke on after his navigation of the financial crisis.
Given this history and the prodigiousness so far of Powell’s efforts and the gravity of the changes under his watch, it would seem likely he would get the nod from the Biden administration. If he is not re-nominated, the most likely alternative would be Governor Lael Brainerd. So far, indications out of much of the Democratic Representatives and Senators is mostly positive. The Biden economic team has voiced support and gratitude for Powell as well. Obviously, a major policy error would undermine his prospects significantly, but he’s proven himself an adept public servant.
Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.30%.
