Soft August Data Likely Pushes Back Taper; Progressives Take Aim At Powell
Soft August Data Likely Pushes Back Taper; Progressives Take Aim At Powell
The headline from 30,000 feet about Jay Powell’s virtual Jackson Hole speech was that the Significant Further Progress (SFP) criteria had been met for inflation but had not yet been attained in the labor market. Several Fed officials, including Lael Brainerd, had commented they would need to see more employment data and the effect of the Delta variant before moving forward.
The jobs report that came in this morning was, on its face, a huge miss. There was a difference of more than 500,000 between the estimate and the actual number. Many commentators have seen that as a reprieve to the Doves. It certainly proved prescient the prediction by our Head of Research, Tom Lee, that “bad news is good news,” given that it will likely result in an extension of accommodative policy.
This certainly seems to be the result of the soft numbers this morning. While certain surveys and the increasing volume of hawkish views from Regional Bank Presidents had begun to support the notion of an imminent taper, the smart money now appears to think November or December is more likely than September or October for the initial announcement of the taper timeline. We mentioned above how there was actually some bullish sub-text to this report. It wasn’t as bad as it seemed, which seems bullish.
The Fed speech last week created a flurry of commentary and activity amongst the Fed-watching class. Many folks had a bone to pick with Powell’s dismissiveness on inflation. Many commentators have been warning that 1970s-style stagflation is now all but certain; however, as CNBC’s Steve Liesman said, “The water has not boiled, the frogs have been safe.” Well said, Steve.
Nonetheless, despite Powell’s confidence in the transitory narrative being robustly displayed last week, concerning trends across the globe and the American economy suggest there may be more to the inflation picture than Powell acknowledged. He omitted key points the opposing side of the argument sees as crucial to their perspective.
A paper by two Fed economists suggested that inflation in rents paid by both renters (and effectively) by homeowners would be significantly rising over the foreseeable future. The slight deflationary pressure on rents has so far given credence to the dovish argument on inflation. Still, if that reverses and shows up in such a necessary expense for Americans, it could quickly change the tune of the FOMC.
The size of the Fed’s balance sheet and its treasury purchases have also recently come under scrutiny. The ‘Bond King’, Bill Gross, suggested that private markets will likely be unwilling to pick up the massive demand being filled by Fed asset purchases at current rates and declared Treasuries to be ‘trash.’ He postulates that because the private sector will demand a higher yield to pick up the slack left by Fed asset purchases, treasuries have nowhere to go in the short to medium-term but up.
A group of far-left Democratic members of Congress, including Alexandria Ocasio-Cortes, called for President Biden to not reappoint Chairman Jay Powell to a second term as Federal Reserve Chairman. Critics on the right also recently suggested his dovishness at the recent symposium was primarily due to his desire to be reappointed, which we find unlikely.
The letter signed by progressive Democrats praised the Adjustable Inflation Target framework but lamented Powell’s reversing of Dodd-Frank Act-era financial regulations, perceived weakness on climate change, and not doing enough to reduce inequality. Subsequent administrations have typically renominated fed chairs nominated by a predecessor of an opposing party; the recent exception would be when Trump nominated Chairman Powell to replace Janet Yellen.
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 1.326%.
