The Most Dangerous Man? Rosengren and Kaplan To Resign Over Trading

The Most Dangerous Man? Rosengren and Kaplan To Resign Over Trading

Elizabeth Warren called Chairman Jay Powell the most dangerous man in America. We suspect that history will judge Powell more in the fashion of Daniel Ellsberg (who also received that title) than Al Capone. We suspect Warren’s attempts to torpedo the renomination will be unsuccessful and that isn’t changed by her recent theatrics. Though betting markets do reflect an increased chance for Brainerd in the wake of the comments. She also just gave a speech at NBER that is worth a read.

It has been the fastest news week for the powerful US Federal Reserve in a while. In congressional testimony, Powell admitted in recent comments that the Fed is indeed persistently high inflation and growth simultaneously challenged in some areas because of the healthcare situation. Nonetheless, despite the frustrating inflation situation, he still sees it as something that is temporary, if not as much as initially expected, that will resolve with time. He stressed that he’s prepared to act if proven wrong.

So, for those who want to bring out the leisure suits and the Studio 54 soundtrack please just relax a little bit. Do you want to be rich or do you want to be right? If there was runaway inflation and Milton Friedman’s ghost was about to save us all then we truly doubt that the US dollar would make its 1-year high, right as the inflation hawks appeared to get something they finally wanted to hear from Powell. The Chairman said he would consider raising rates if he saw evidence that surging prices were increasing household inflation expectations, which can turn into a self-fulfilling prophecy.

Investment grade bonds actually had their spreads drop and high-yield spreads remained tame despite the second busiest month of issuance on record. If you’re certain, than odds are you’re wrong. The 10-year breakeven inflation rate has remained rangebound around 2.35%. Luckily, consumer inflation expectations have not significantly moved since peaking in May. Fingers crossed. Knock on wood.

Equity outflows had their worst week in three years last week. This was the largest redemption since February 2018. Yup, that’s right. We would think this suggests that the panic is overdone and the market is clearing before it can perceive a reality of high growth alongside COVID-19 being endemic, but much more manageable. So while outflows achieved a greater level than during the height of COVID fear, the U.S. Corporate debt-to-equity ratio also sits at 25% which is the lowest levels going back to the heyday of Studio 54. Which is more important? We think the latter is.

Fed Presidents Eric Kaplan and Eric Rosengren were two of the leading hawkish members of the world’s most important Central Bank and they will be leaving as a result of a trading scandal. So the Fed has become more hawkish on the dot plot but has also lost two of the leading hawkish voiced. We will be sure to pay attention to the implications of this change.

Powell himself admitted to have some investments in municipal bonds and he definitely didn’t appear pleased by what his colleagues had done, but did defend them publicly and avoided any damning statements. Both men saw the trading scandal as a distraction for the Central Bank. It should be noted Kaplan’s trading was a lot more to look at than Rosengren’s. The former Boston Fed President’s transactions were mostly under $50,000 while Kaplan’s were much more high-flying. Watch for similar issues at foreign central banks.

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 1.463%. The weekly rate of change slowed significantly from last week.

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