• Posted on May 2, 2024
  • by MI2 Research

“You can’t look to a rule, these are going to be judgement calls”

With another “most important Fed meeting of our lifetime” squarely in the rearview, and the first round of knee-jerk market moves pass to the side mirrors, it’s worth reflecting a little on the Fed Chair Powell’s “works”. The “biggest” move was the announced tapering of treasuries QT to roughly $25b from the previous rate of $60b of run off a month, but beyond that Fed confidence was conspicuous by its absence. The Chairman stated as much, admitting that “the data have not given us that greater confidence” that inflation was moving toward the 2% goal that Powell indicated necessary (how long is a piece of string?) for cuts. The uncertainty reappeared when he explained his thoughts on the path of inflation, “I think there are paths that the economy can take that would involve cuts and there are paths that wouldn’t, and I don’t have great confidence in which of those paths…”

Yet despite the lack of confidence, Powell did have clarity on certain features of the Fed’s reaction function. “Unexpected weakening in the labor market” for example, or more generally anything that led to greater confidence in inflation coming back into their comfort range – “we do gain greater confidence… that inflation is moving sustainably down to 2 percent” would earn some easing. On the other hand “Persuasive evidence that our policy stance is not sufficiently restrictive” would earn a hike (though the repeated references to “restrictive policy” is beginning to sound like Jimmy Stewart talking about Harvey). “Inflation is moving sideways and we’re not gaining greater confidence” = “hold off on rate cuts”.

On “what’s causing inflation” Chair Powell said, “I don’t know if there’s an obvious connection… with the easing of financial conditions”. The lack of easing (let alone the recent apparent reacceleration) in housing services inflation is down to “substantial lags” and Powell also gave a nod to the idea that the increase in the potential output of the economy was thanks to participation and immigration, a potential expansion on the dynamics noted by Ernie Tedeschi.

Macro guys were also interested in the latest QRA, which indicated that the Treasury plans to “keep auction sizes steady” over the next several quarters. However, within the announcement were a couple of important details. First, the Treasury will be engaging in “liquidity support” buybacks for off the run issues (that distant roar was the sound of primary dealers cheering). Second, the Treasury expects to end Q3 with $750bn in the TGA, followed by $850bn in September. While this may seem like a bit of insider baseball, it argues against Yellen and friends adding some juice to markets with the idea of putting a thumb on the economic scale to improve Biden’s chances of winning in November. We would of course not want to count the chickens before they hatch and there’s nothing about the report that sets it in stone (needs must and all that).

Switching gears slightly, while we give the Fed a hard time about its “restrictive policy” incantations and its Quixotic “tilting” with financial conditions, it is true that trees don’t grow to the sky. Take for instance the latest headlines around Google. First, the search giant is restarting the antitrust trial that its army of lawyers had done their best to slow walk. Sadly, much of the trial is in camera, which is a shame given it puts Google’s argument that it provides the best experience up against the fact that it “paid $26 billion in 2021 to secure its position as a default search engine on mobile phones and web browsers”. We would have loved to learn how skilled lawyers reconcile those two statements. Second, Google “laid off at least 200 employees from its ‘Core’ teams”. As an amusing kicker, the company’s reorganization “will include moving some roles to India and Mexico”. Sorry digital nomads! Google isn’t alone and Tesla received additional negative headlines for rescinding offers to summer interns. How good can things be?