- Posted on December 5, 2024
- by MI2 Research
“We can make our decisions without them being reversed”
We would be the first to admit a tendency towards pedantry: that we enjoy a little definitional punctiliousness. Surely, we are not alone in being amused by then-President Clinton asking, “what the meaning of ’is’ is”. But rather than being a mark of a scholar, this kind of diving into minutiae is often as much a sign of sophistry as it is of sophistication. Case in point was the debate around the definition of “transitory”. It might seem intuitive that trees don’t grow to the sky, but Yellen and crew somehow wanted to argue that that was why they had in fact been right all along in their argument that Covid era inflation was “transitory”. Yes, Janet, you were right that, like all things, this too did pass.
But perhaps even more interesting is when someone makes a specific and intentional pivot in their definition. Indeed, most of us would watch out if a business partner opted to modify the definition of business expenses to include all-inclusive resort vacations (if that was already part of the definition, good for you). This is precisely why we find it… interesting that Powell and friends are evolving their understanding of the word “independent”. Previously, the chair had taken issue with the insinuation (slander!) that the Fed’s decisions were in any way politically motivated (“We just don’t do that”). This political motivation/pressure argument was echoed in the speech by Fed governor Kugler, who stated that “An independent central bank is one that can carry out monetary policy insulated from pressures arising from other parts of government or elsewhere”. However, this week, Powell caught headlines for clarifying that an independent central bank is one whose decisions are not able to be reversed by politicians, see the section’s title. Powell is not really changing his definition (it’s the same as he gave in the interview around the time of Kugler’s speech), but why the discrepancy? The cynics among you may join us in wondering if Powell is trying to build a narrative and support ahead of Fed independence (whatever it is) being tested. Is the Fed expecting to butt heads? Good luck, Jerry, “the strong do what they can and the weak suffer what they must”.
“Expectant optimism”
As part of the New York Times discussion mentioned above, Powell noted that the US is “the envy of large economies around the world” and this was perhaps borne out by the latest Beige Book data, which reported that “Economic activity increased slightly in November after little change in preceding months”. But more notably, and echoing the dynamics we discussed a few weeks ago, “US businesses grew more upbeat about demand prospects”. Has Bostic’s “Expectant optimism”, where business owners stood “ready to deploy assets and ramp up hiring” turned to action? Time will tell, but while this would perhaps be good news for the economy in general, it may be tough medicine to swallow for the bond market especially given the looming threat of tariffs, labor market turmoil, and increases in the cost of Canadian goods sent by post?! We kid on the last one, but a resurgence of economic activity and animal spirits would not be welcome to those banking on rate cuts.
