Tag: Fed Chair Jerome Powell

Does Inflation Matter?

Posted on by George Yacik

The Great Inflation Debate continues.

Senator Joe Manchin, the West Virginia Democrat, became if not the first, but certainly the most prominent politician to sound the alarm about rising inflation and the Federal Reserve’s role in it.

“With the recession over and our strong economic recovery well underway, I am increasingly alarmed that the Fed continues to inject record amounts of stimulus into our economy by continuing an emergency level of quantitative easing (QE) with asset purchases of $120 billion per month of Treasury securities and mortgage-backed securities,” the senator wrote in a letter to Fed Chair Jerome Powell.

This “has led to the most inflation momentum in 30 years, and our economy has not even fully reopened yet. I am deeply concerned that the continuing stimulus put forth by the Fed and proposal for additional fiscal stimulus will lead to our economy overheating and to unavoidable inflation taxes that hard-working Americans cannot afford. Therefore, I urge you and the other members of the Federal Open Market Committee to immediately reassess our nation’s stance of monetary policy and begin to taper your emergency stimulus-response.”

Needless to say, as the Wall Street Journal pointed at, that concern hasn’t prevented Manchin from voting with his party to spend trillions more and add trillions more to the federal deficit.
(By the way, did you hear any criticism of Manchin for trying to “politicize” the Fed? No, me neither).

A few days later, we received the latest indication that inflation may not be as transitory as Powell and many others Continue reading "Does Inflation Matter?" →

Looking Past Powell

Posted on by George Yacik

Jerome Powell's term as chair of the Federal Reserve doesn't end until next February, but the handicapping of his reappointment has already begun. A recent poll by the Wall Street Journal found that three-quarters of economists it surveyed believe Powell will be renominated by President Biden, but I would argue that the odds are at best 50-50, if not lower.

Powell has unquestionably been friendly to the financial markets, which counts in his favor on Wall Street, but that may be a detriment when it comes to the progressives who are likely to have the biggest voice in choosing the next Fed chair. Right off the bat, Powell checks off none of the boxes that progressives are looking for, and as he has shown since his inauguration, Biden almost never goes against what they want.

Let’s look at Powell’s negatives: He's a white male. He's a Republican. He comes from Wall Street. He's rich (although most people at this level are). Let's also not forget that Powell was nominated to his position by President Trump, which automatically disqualifies him in the eyes of many, never mind the constant barrage of criticism Trump leveled at him once he was seated.

Just the taint of being associated with the former president should be enough to make him unsuitable for another term.

More importantly, however, Powell has not publicly bought into the prized objectives of the left, namely using the Fed to further social policy (i.e., wealth redistribution) and climate change initiatives, asserting that those are political decisions better left to Congress. Continue reading "Looking Past Powell" →

Market Jitters And The Consumer Price Index (CPI)

Posted on by Noah Kiedrowski

The Consumer Price Index (CPI) readings have become a top topic as of late and have directly impacted market movements and overall sentiment. These CPI reports are becoming more significant as these readings are used to identify periods of inflation. More robust the CPI readings will translate into a stronger influence on the Federal Reserve’s monetary policies. The Federal Reserve is reaching an inflection point where they will need to curtail their stimulative easy monetary as inflation, unemployment, and overall economy continue to improve. As a result, their long-term monetary policy of low-interest rates and bond purchases will inevitably need to pivot to a scenario of higher rates to tame inflation. As a result, investors can expect increased volatility as these critically important CPI reports continue to be released through the remainder of 2021. Additionally, any notion of higher rates may spur investors to reduce exposure to equities.

CPI Market Jitters

Recent CPI readings have spooked the markets as these serve as a harbinger for the inevitable rise in interest rates. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. The overall markets as assessed by any historical measure have reached stretched valuations with record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Moreover, the prospect of rising rates may introduce some systemic risk in the process. The confluence of rising rates, a hot housing market, and robust CPI readings may translate into real inflation rates that exceed the Federal Reserve’s target inflation zone. If these real inflation excursions drag on, these higher rates will be in the fold. Continue reading "Market Jitters And The Consumer Price Index (CPI)" →

Financials - Stress Tests Easily Pass

Posted on by Noah Kiedrowski

Federal Reserve, CPI and Prospective Rate Increases

A string of robust Consumer Price Index (CPI) readings spooked the markets as a harbinger for the inevitable rise in interest rates. Furthermore, Federal Reserve commentary also induced volatility in the markets when Jerome Powell spoke in early June. As investors grapple with the prospect of downstream rate increases, pockets of vulnerabilities throughout the market have been exposed. The overall markets have been on a blistering bull run since the November 2020 presidential election cycle. Year-to-date, the S&P is up over 16%, while all valuation metrics are misaligned with any historical comparator with heavily stretched valuations and record risk appetite. As real inflation enters the fray, these frothy markets will come under pressure and possibly derail this raging bull market. Although rising rates may introduce some systemic risk, the financial cohort is poised to go higher. The confluence of rising rates, post-pandemic economic rebound, financially strong balance sheets, a robust housing market, and the easy passage of annual stress tests will be tailwinds for the big banks.

2021 Financial Stress Tests

The recent stress tests were easily passed and indicated that the biggest U.S. banks could easily withstand a severe recession. In addition, all 23 institutions in the 2021 exam remained “well above” minimum required capital levels during a hypothetical economic downturn.

The central bank said that the scenario included a “severe global recession” that hits commercial real estate and corporate debt holders and peaks at 10.8% unemployment and a 55% drop in the stock market. While the industry would post $474 billion in losses, the Fed said that loss-cushioning capital would still be more than double the minimum required levels. Continue reading "Financials - Stress Tests Easily Pass" →

Don't Fear The Taper

Posted on by George Yacik

Long, long ago, even before the 2008 global financial crisis, the world’s central bankers, including the Fed, shifted their focus from trying to fight inflation to trying to create it. As we know, however, that pursuit of the holy grail of 2% has taken more than a dozen years, and now that we appear to be there, and well beyond it, in fact, the Fed refuses to believe it.

Ever since the economy began reopening earlier this year, the U.S. year-on-year inflation rate has been rising steadily and strongly, well above the Fed’s 2% target. In May, the YOY rise in the consumer price index hit 5.0%, while the core index, which excludes food and energy prices, rose 3.8%. Looking ahead, it’s hard to see inflation easing anytime soon, given the trend in rising worker’s wages, which once on the books are going to be hard to pull back, especially given the dearth of workers relative to job openings. Prices are also rising due to strong pent-up demand that is far outpacing the supply of goods, due partly to the lack of workers.

Yet Fed Chair Jerome Powell continues to insist that this recent surge in inflation is “transitory,” a mere temporary reaction to the economic reopening.

Is he saying that because he really believes it, or because he’s worried what will happen if the Fed starts to turn down the juice, even a little bit, and with a fair warning? Continue reading "Don't Fear The Taper" →