Powell To Review Ethics Codes, Next Meeting To Illuminate Tapering Plans

FS Insight Team

The Federal Reserve Chairman himself has become embroiled in the ethics concerns we reported on last week caused by the admission of Bank Presidents Kaplan and Rosengren that they had traded in securities that would have likely been affected by the Fed’s purchasing activities. It has now come out that Jay Powell himself owned municipal bonds, which was one of the assets purchased by the Fed during their emergency pandemic response.

This comes also at a somewhat sensitive time for Powell since the Biden Admin is expected to shortly announce a decision on whether they will re-establish the precedent of re-nominating Fed Chairman selected by their predecessor of the previous party. One of Powell’s main achievements was political, aside from all his actions on the policy side, President Trump personally targeted Fed independence in way not seen since the early days of the Cold War.

Powell simply responded that President Trump did not have the authority to fire him and kept doing what he thought he should. The urge of the Biden administration to restore political normalcy after the Trump years likely will look favorably on this performance by Powell despite his support of easing regulations. Betting markets have his odds of renomination at about 85%.

Elizabeth Warren sent 12 letters to all Fed Banks demanding that they adopt stricter ethics codes. This is likely what motivated Chairman Powell to order the staff of the Federal Reserve to do a bottom-up review of ethic rules surrounding trading and stock buying.

The press spokesman of the US Central Bank said he ordered the review “because the trust of the American people is essential for the Federal Reserve to effectively carry our important mission.” He continued that the Board will make any appropriate changes if moral hazards or conflicts of interests are found. The trust of the Federal Reserve is already being called into question by many people in the financial industry who question the sustainability and long-term consequences of such a rapid balance sheet expansion as has occurred since March 2020.

Many would likely also see the caving of the Biden Administration to progressive demands that he nominates Lael Brainerd as a move away from Fed independence. Thus, we view it as highly likely, even given the trading hubbub, that Powell will be renominated.

The Federal Reserve is juggling quite a lot right now. If renomination and the vital decision on how to turn policy in a way that doesn’t undermine post-pandemic success or make US debts unsustainable now there is a major ethics issue to contend with.

Luckily, the slowing of recent inflation numbers seem to suggest that Powell may be more right on the transitory narrative than the army of hyperventilating Fed skeptics would care to admit. However, the data is very noisy and a recent rise in inflation expectations, which can have a self-fulfilling element, have reached their highest levels since the Global Financial Crisis.

The ten-year appeared to rise at least partially in anticipation of the Fed meeting last week. As our Head of Research, Tom Lee, has said the recent bad news may actually be good news for markets. The Delta variant may have made Fed officials more hesitant to taper and thus more likely to continue the extraordinary support for the economy that the stock market is so fond of. However, as we repeatedly tell our subscribers corporate efficiency, margins and earnings expectations are all quite positive and indicate a strong economy.

There has been a bit of a dead-spot in direct Federal Reserve catalysts since the Jackson Hole meeting. However, the FOMC meeting on next Wednesday and Thursday will be closely watched by markets and will likely provide more information on tapering plans. While the Fed has warned tapering and rate rises should not be directly tied to each other, when markets get more information on tapering plans, interest rate expectations will likely change as a result since most think the Fed will certainly not raise rates until asset purchases have ceased completely.

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 1.363%.

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