This guest commentary was written on 2/10/21 by Chief Market Strategist Mike O'Rourke of JonesTrading.
Chairman Powell’s speaking engagement at the Economic Club of New York was the typical softball affair one would expect.
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It should be an embarrassment that meaningful questions are not asked in such a historic environment. The reason they are not asked is because we all know the answers and the answers are a combination of disturbing and dangerous. Chairman Powell continues to assert the narrative that the FOMC’s policy approach seeks to aid the weakest and most vulnerable. He reminds us that this population was the last group to experience meaningful gains after 10 years of economic expansion. |
But it is left unspoken that the pursuit of this policy is driving wealth disparity to record levels.
In essence, he is saying that his way of helping the poor is to make the ultra-wealthy much wealthier. It should be embarrassing that he is not called out on this.
The Fed can keep monetary policy very accommodative without perpetual asset purchases. The key theme for investors from Chairman Powell’s speech today is his reiteration that the Federal Reserve will not be raising rates or halting asset purchases at any time in the foreseeable future.
Once again Powell asserted that policy accommodation will not be removed until inflation is 2% or above and runs there for a period of time.
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While that sounds simple enough, during the 21st century, Core PCE has only registered readings of 2% or above 25% of the time. The track record is even worse over the past decade. Over the past ten years, Core PCE has registered readings of 2% or above only 11% of the time. Two percent has been an extremely hard target for this economy to hit during a record expansion. The FOMC’s goal posts are essentially set at what are arguably unachievable levels. Although this would seemingly indicate perpetually easy policy, the day will likely come when the FOMC will find itself in a position where policy needs to be adjusted. |
At that point in time, the central bank will once again arbitrarily adjust its policy interpretation so that the Committee can react how it wants.
Another notable flaw in Chairman Powell’s rigid monetary policy is the significant impact of the massive amounts of fiscal stimulus.
Today Powell reiterated the importance of fiscal stimulus for the recovery. As usual, he deflected detailed questions giving the standard answer that fiscal policy is the purview of Congress and he again asserted that monetary policy will not adjust in conjunction with fiscal policy.
The Fed has been purchasing $120 Billion in assets per month since last summer.
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In the Fall, FOMC officials stated that their forecasts included some type of stimulus. We did receive a $900 Billion stimulus going into year-end 2020, which should have generally met expectations. Subsequently, the White House and Congress are working on an additional $1.9 Trillion in stimulus and the Chairman indicates there will be no changes in the FOMC’s monetary policy approach until inflation rises above 2%. |
With the central bank blindly and rigidly following a misguided policy, it is understandable why financial markets have entered a mania.
EDITOR'S NOTE
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.
