This guest commentary was written on 11/15/21 by Chief Market Strategist Mike O'Rourke of JonesTrading. This piece does not necessarily reflect the opinion of Hedgeye.
The inflation hawks were out in force today and they are making the Fed Chairmanship conversation interesting. The looming question is to what level will inflation push the Fed Funds rate?
Former Richmond Fed President Jeff Lacker speculated that the Fed Funds rate could rise to 3.5-4% and potentially push the economy into a recession. Lacker was traditionally an ardent hawk in his time at the Fed, and that does not appear to have changed.
As a quick aside, the Fed Funds rate has not touched 3% since early 2008. Such a hawkish prediction from a hawkish observer might quickly be dismissed, but with the hottest inflation in 30 years, one cannot preclude any outcome.
Former NY Fed President Bill Dudley appeared on Bloomberg Television prior to Lacker. Dudley said the Fed Funds rate will likely peak at 3 - 4%. Dudley was the FOMC Vice Chair during the Bernanke and Yellen regimes and generally supported their dovish tendencies.
Rarely would one see Lacker and Dudley share such a similar perspective on interest rates. Since leaving the Fed, Dudley has been more forthright, but today's consistency is worth noting.
In addition to the Fed Presidents expressing their view, former Treasury Secretary Larry Summers weighed in on inflation with a Washington Post Op-Ed. Summers has spent most of the past 2 ½ decades as the Democratic Party's most prominent economist.
Now he is the most vocal critic of its economic policies. Summers has also been highly critical of Federal Reserve policies in 2021, largely due to his belief that they will fuel inflation. In today's Op-Ed titled “On inflation, it's past time for team 'transitory' to stand down,” Summers succinctly dismantled the Fed's defense of its “transitory” view on inflation.
In the conclusion of his Op-Ed, Summers highlighted the gravity of the situation for his fellow Democrats. “Excessive inflation and a sense that it was not being controlled helped elect Richard Nixon and Ronald Reagan, and risks bringing Donald Trump back to power.” It is another anecdotal sign of excessive market complacency when the Democratic Party does not give Larry Summers the time of day on economic matters.
The WSJ, which is extremely good at reporting on the Fed, had an article today indicating the Fed Chairmanship is a two horse race between Chairman Powell and Fed Governor Brainard.
Are we to believe that amidst the worst inflation in three decades, there is only one potential alternative candidate to Chairman Powell? And that the sole alternative is an internal candidate who works closely with Powell and has generally supported his policies and approach?
In describing how they differ, the WSJ started by saying that “The two appear closely aligned.” This evening Bloomberg is reporting that Senate Banking Committee Chairman Sherrod Brown said the announcement is imminent and he believes it to be either Powell or Brainard. Main Street America is growing more frustrated by the economic environment with each passing day.
If inflation is not brought under control, it will likely be the factor that defines the Biden Presidency. It is hard to understand why officials of the status quo would be the only ones under consideration.
It should be obvious that Biden should want anything but the status quo, or else he will own the inflation problem wholly and his party will deserve the political fate that awaits.
There is irony in that a Fed Chair chosen for political reasons will wind up fueling the political damage. We took it as a positive sign that Roger Ferguson could not assume his new role as Vice Chairman at Apollo Global Management.
We still believe Ferguson would be the best candidate for the position of Fed Chairman. His extensive experience at the Fed (prior to the past 13 years of asset purchases and zero interest rate policy) are needed to put monetary policy back on stable footing.
This is a Hedgeye Guest Contributor piece written by Mike O'Rourke, Chief Market Strategist of JonesTrading, where he advises institutional investors on market developments. He publishes "The Closing Print" on a daily basis in which his primary focus is identifying short term catalysts that drive daily trading activity while addressing how they fit into the “big picture.” This piece does not necessarily reflect the opinion of Hedgeye.