EDITOR'S NOTE
I thought Dave Zervos was overreacting last week when he immediately came out and declared that the Fed's latest policy meeting, which ended on Wednesday, was hawkish.
Come on, man! I thought, channeling Randy Moss. What more could you possibly want from them?? Well, it turns out, he was prescient. The market has been on a slide ever since, with the S&P 500 down about 150 points, or about 4.5%.
Zervos, a strategist at Jefferies, said the Fed wasn't explicit enough about its new "average inflation targeting" framework; that in other words, it wasn't committing explicitly to just how much it would let the economy "run hot" in order to bring down the unemployment rate. And that's been unsettling to markets because markets aren't convinced the Fed can or will actually follow through on this, not least because the Fed's own forecasts, released in conjunction with last week's policy statement, showed they wouldn't get to over 2% inflation through at least 2024.
And if you were already worried the Fed isn't serious about following through on this, the Fedspeak this week has been extra unnerving. The Fed's Charles Evans, for instance, suggested the Fed could still raise rates before inflation hit 2%. Rhetoric from the likes of Bullard, Rosengren, and others did little to project the image of a Fed unified around and serious about achieving this new goal; it was rather all over the place.
Diane Swonk, who joined us on Power Lunch yesterday, suggested the Fed might have an ulterior motive for this; namely, prodding Congress to pass more fiscal stimulus. Indeed, everyone from Chair Powell on down has said over and over and over again that more fiscal support is needed to keep the recovery going and that the Fed can't do it all on its own. Some conspiracy theorists even think Fed officials are trying to sow market disruption to undermine Trump's reelection.
Paul McCulley, formerly of Pimco, thinks Wall Street is just being a bunch of babies. "Wall Street wants a formula and the Fed is pushing back hard" against that, he told us this week. They don't want to get trapped, he said.
Which is fine, but what "Wall Street" really wants is the Fed to somehow prove that it means what it says. Yes, the Fed committed at its meeting to zero rates until unemployment falls below 4% or inflation moves above 2%, said Michael Darda of MKM Partners; "but it may not have the teeth the Fed was hoping it would. Perhaps because when the Fed had a chance to overshoot during the last cycle, it raised rates for two years and drained liquidity instead, despite mostly sub-2% inflation."
"Why not step up the pace of bond purchases until/unless inflation expectations hit levels more consistent with average inflation targeting at 2% over time?" Darda said. "Fed Chair Powell didn't explain if this option was considered, and if so, why it was rejected."
Now you have Democrats floating a new, $2.4 trillion Covid relief bill, so the Fed's slight chaos this week may yet help it achieve at least the near-term goal of prodding D.C. to act. But it's not entirely true that it's all up to fiscal stimulus now. The Fed's better clarifying of its own goals and and willingness to achieve them could itself go a very long way.
See you at 1 p.m!
Kelly KEY STORIES
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Jumat, 25 September 2020
It's all the Fed's fault
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