This guest commentary was written on 5/5/21 by Chief Market Strategist Mike O'Rourke of JonesTrading.
It was a surprising trading day on multiple levels. First is the trading action itself, and second is a mishmash of commentary originating from Biden Administration officials giving the strong impression there is not much confidence in Chairman Powell and the monetary policy framework he is pursuing.
Just under three months ago, in a Closing Print titled “Time for Change,” we highlighted the risks of Chairman Powell micromanaging “the largest economy in the world based on a single metric.” Hopefully, the body language from the Biden Administration today is the first indication that there will be a new Fed Chair in February.
There were three separate incidents today with three different Biden Administration officials where statements signaled a lack of confidence in Chairman Powell. The first came from President Biden’s closest economic advisor, Jared Bernstein. The second were the surprising, and inappropriate, remarks from Treasury Secretary Yellen about raising interest rates. Yellen subsequently walked those comments back in a WSJ interview after the close.
Third were comments from White House Press Secretary Jen Psaki that the White House takes inflation risk incredibly seriously. Prior to that political and monetary policy drama, there was an inexplicable meltdown of Nasdaq 100 futures shortly after 7:30am Eastern time.
Treasuries garnered an initial haven bid that subsequently faded on Yellen’s speculation that interest rates may need to rise. It is worth noting that Secretary Yellen’s interview that sparked the controversy was recorded yesterday. Thus, she had ample time to clarify her comments prior to release at 11 am today.
A clarification would have avoided the incident and the subsequent mea culpa after the close today. It also raises the question as to whether the Treasury Secretary’s comments about raising interest rates to prevent the economy from overheating were leaked, and potentially were the catalyst for the inexplicable equity selling that started the day.
Following the equity selloff, the timeline proceeded in the following fashion. Immediately prior to the US cash equity open, Jared Bernstein was interviewed by Politico’s Ben White.
White wrapped up the interview specifically asking for a "yes or no answer" as to whether the President should reappoint Powell as Fed Chairman. Bernstein responded, “I’m not going to get into that. Neither yes nor no at this point…It’s a process that hasn’t -- that we have to go through before we even start talking about it.”
Admittedly, it is simply a non-answer by a Presidential advisor who was placed on the spot. Nonetheless, Bernstein did not go out of his way to provide the typical political boilerplate and affirm the President’s “confidence” in the Fed Chairman.
Shortly after 11am, headlines crossed about Treasury Secretary Yellen talking about rising interest rates. She commented, “It may be that interest rates will have to rise somewhat to make sure our economy does not overheat, even though the additional spending is relatively small relative to the size of the economy…It could cause some very modest increases in interest rates to get that reallocation, but these are investments our economy needs to be competitive and to be productive.”
This is a stunning statement for multiple reasons. First, having been a Fed Chair, Secretary Yellen is well aware that out of professional courtesy former Fed Chair’s generally don’t comment on specific policy action.
Furthermore, Yellen is not retired at a think tank. She is the current Treasury Secretary and any statement about policy that she makes will carry meaningful weight. Since monetary policy is not Treasury’s purview, it is deemed inappropriate for the Secretary to suggest policy. For like reasons, the Fed Chair does not discuss the nation’s Dollar policy or fiscal policy.
A Treasury Secretary’s overstep in this regard may be deemed highly inappropriate because it raises significant doubts about the central bank’s independence. That said, President Trump’s infringement in Fed independence and Powell’s appeasement of him were far worse than what occurred today. Nonetheless, since Yellen’s comments were recorded yesterday, she had ample time to realize they might be controversial and clarify them before release. Instead, she was forced to express her confidence in Chairman Powell after the fact this afternoon.
The third strike was shortly after 1pm when a headline crossed about former White House Press Secretary Jen Psaki addressing inflationary risks. Psaki was asked if President Biden specifically agrees with Yellen’s comments that interest rates may need to rise.
Psaki responded, “I think President Biden certainly agrees with his Treasury Secretary, but I will say that -- one of the reasons I think you're asking this question is about inflation concerns, and something that we watch closely here obviously, in the Treasury Department and in the White House, in close coordination. …So of course, officials who don't work here-in the Federal Reserve and other places-closely watch what needs to happen. I'm not going to speak on interest rates. But we also take inflationary risk incredibly seriously.”
Psaki did follow up noting that “Secretary Yellen certainly understands the independence and the role of the Federal Reserve. And I think she was simply answering a question...” With the exception of the Trump Administration, it is rare to have such noteworthy commentary about monetary policy coming out of the White House.
Secretary Yellen talked about mild rate increases to prevent the economy from overheating. That perspective is consistent with the Fed’s historic monetary policy framework and a clear divergence from Powell. Last year, Powell abandoned the longstanding framework for one that is focused almost exclusively on fostering 2% inflation. Now that prices of many goods are skyrocketing, doubts are emerging about Powell’s approach. While the events of today have the appearance of harmless commentary, they are likely the opening salvo to pave the way for a new Fed Chair in February when Powell’s term expires.
Powell is arguably the least likely candidate for Biden to support. Powell is a Trump appointee who buckled to Trump’s political pressure.
Powell comes from a Private equity background and has overused policies that drive wealth disparity. None of this aligns with President Biden’s agenda for reshaping the nation.
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.