EDITOR'S NOTE
Markets weren't in a great mood yesterday to begin with (unfortunately for Squarespace's direct listing, the first to open below its reference price), but the Fed's minutes out at 2 p.m. ET didn't help.
The key phrase: "A number of participants suggested that if the economy continued to make rapid progress toward the Committee's goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases." (Emphasis mine.) In other words: Taper talk!! AHHHH!!! That sent stocks back towards session lows.
We'll be speaking with Morgan Stanley's chief U.S. economist, Ellen Zentner, about this at 1 p.m. today. She is expecting the Fed to start tapering (reducing the pace of its massive monthly bond purchases) next April, and to start talking about it this September. This is pretty close to consensus, as our Steve Liesman has been reporting. And it would make sense, back in the Fed's olden days. Lean against stronger growth and inflation, make sure you're not stoking any asset bubbles--that was the whole point of their post-financial crisis introspection!
But this time may be very, very different. Marko Papic of Clocktower warned investors about this on our show yesterday: The Fed is Not Going to Pull Back, he says; it will aggressively pursue its socioeconomic goals. "Policymakers in the U.S. are motivated by a sense that the median voter is ready to revolt," he says, and will do what France did in response to its own social unrest in the 1960s: redistribute income away from the top 10% using all tools including letting the economy "run hot."
Quoting Fed official Lael Brainard, Papic noted her warning last September that "the longstanding presumption that accommodation should be reduced preemptively...risks an unwarranted loss of opportunity for many Americans." In other words, the Fed is not going to move preemptively this time around. Remember how strong wage growth and job gains were for non-college education Americans by the end of the Trump administration before the pandemic hit? They want to get back there, fast, no matter what's happening with stocks, growth, and inflation in the meantime.
Or as the economist Larry Lindsey observed this morning, "The real news [about yesterday's minutes] should have been that only three or four participants really believed that tapering should be discussed if the Committee's stated objectives were met." The Fed, he insists, can't taper next year or it will face huge political pressure. "Markets need not worry about tapering before November 2022"--election season, he wrote.
So we are about to witness two great experiments--the first, whether the Fed is truly committed to this new framework and how markets (especially bond markets) finally digest that. The second is whether the framework will actually work in achieving these societal goals.
As Michael Darda of MKM has observed, "Inequality [actually] 'soared' during the disinflation of the 1980s and 1990s and was 'low' during the elevated inflation period between the mid-1960s and early 1970s." More recently, "we have been told that the Fed's QE/zero rates policy was to blame for inequality, even though a host of inequality metrics either leveled out or began to reverse during the last cycle," he wrote.
The net worth of the bottom 50% has been growing faster than the top 1% for about the last decade, Darda notes, citing Fed data--plus we saw a rise in real median incomes in those last few years before Covid hit. "These trends transcended political administrations," and thus any link between monetary policy or politics and inequality is not as clear-cut as it's often made to sound.
Could the Fed's "run-hot" policy actually do more harm than good for the most vulnerable Americans? We may be about to find out.
See you at 1 p.m!
Kelly KEY STORIES
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Kamis, 20 Mei 2021
Fear of the Taper
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