This Week’s Message: Deer In The Headlights

I listened intently to Fed Chair Jerome Powell’s post-policy meeting press conference this morning, and, after, say, a half-dozen questions, and after parsing the good chairman’s answers, I found myself imagining being there and posing a question of my own.

Here’s how I imagined that playing out:

Chairman Powell, you and your members have tweaked your guidance for the markets to essentially suggest that you’re going to allow inflation to rise above 2% without adjusting policy in response.

You’ve provided an interesting narrative around that, but, before you repeat your latest, let’s approach it from a different angle; what actually would occur in today’s corporate debt space if indeed you began raising rates and/or reducing your mammoth balance sheet in response to inflation — or to the prospects for future inflation (or for the need to restock your ammunition) — as you definitely would have (and tried to just before the ~20% stock market selloff in Q4 ’18), say, a year or two ago?

With all due respect — and, I promise, I don’t mean any disrespect (Powell and his team are doing their best) — his answer would be jumbled, defensive, and ultimately unhelpful to market participants.

Reason being; the Federal Open Market Committee members — of (best intentions notwithstanding) their own doing — are your proverbial deer in the headlights. If the economy slows markedly (read recession), credit ratings decline, BBB-rated and below corporate bonds blow out and the private equity world implodes. Should they raise rates, yields spike, investors scream out of corporate bonds and private equity implodes. In either instance all hell breaks loose across financial markets.

For the time being, which could extend well into the foreseeable future — barring a political/geopolitical or other global event — traders will likely remain sanguine as long as the consumer, the glue holding everything together, holds up. 

I.e., the Fed has made it very clear that they are simply not going to tighten (raise rates or actively reduce their balance sheet), therefore, it’ll ultimately be an accelerated slowing in the economy that forces reality onto the corporate debt space — and onto the financial markets in general.

We’re thus keeping intensely focused on the data; the prospects for labor going forward in particular…

Quote of the Day (at least):

“Vulnerabilities to financial stability are moderate overall.”

–Fed Chair Jerome Powell, January 29, 2020

Quote of the Year (2007)

“…overall economic prospects for households remain good. Household finances appear generally solid, and delinquency rates on most types of consumer loans and residential mortgages remain low.” 

–Fed Chair Ben Bernanke, February 15, 2007

Economic Quote of the First Decade of the 21st Century: 

“The Federal Reserve is not currently forecasting a recession.” 

–Fed Chair Ben Bernanke, January 10, 2008

Thanks for reading!


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