Walk Softly And Talk With A Big Stick

Federal Reserve chief Jerome Powell said today that the gloves are off in the Fed’s fight against inflation:  


He’s talking the talk. As for walking the walk … well … not so much. Tough words about inflation fighting resolve, hiking in bigger 50 bp steps, doing what it takes, bla bla bla.

Meanwhile there’s utterly nothing standing in the way of higher rates now.  Instead of calling a phone conference and announcing a rate hike, Powell chose to make a speech about hiking rates. The Fed funds target today is a mere 0.25%-0.50%. 

Why not higher sooner?  The Fed only likes decisive action when it comes to cutting rates.  It prefers to move glacially, in baby steps, when it comes to hiking.  It’s mantra for years was lower for longer.  It could have given itself the space to move in nice little quarter point increments – by getting started a year or so ago – but it didn’t.  Its canon doesn’t allow rates higher than zero as long as QE is going on … just don’t ask why.

It looks for all the world to me that Powell is just afraid to raise rates. But I think he’s getting nervous about the bond market and hopes that talk will pinch hit for action. Treasury prices have been plunging on inflation and the market is looking for reassurance the Fed will act. But time is not on Powell’s side. He’s trying to buy some with words, but so far the bond market remains unconvinced and is forging ahead, hiking on its own.

That the Fed is being led as opposed to leading is clear from the yield curve. Yields are in a relatively shallow upslope from a year or so on out, but the curve from the front up into that area is very steep. From two years to twenty there are only 53 basis points; from one month to just two years there are 192.  This indicates yields at the very short end are as low as they are only because the Fed is sitting on them. It’s not leading … it’s being dragged kicking and screaming into raising rates.

Is this a Fed that really has its heart set on beating inflation?  Or one that wants to talk on stage about starving inflation while continuing to feed it behind the curtain?  

My point is not necessarily that it’s the latter, but that the Fed has gone off the deep end in terms of obsession with future policy moves at the expense of the present.  Let’s assume for example that the coronavirus outbreak in February of 2020 altered the appropriate short rate for March.  Or that the outbreak of war two years later did the same.  In either case the appropriate rate for March was not and could not have been known in January.  Important March inflation data aren’t even known in February.  Yet here we are in March 2022 obsessing over the appropriate rate for May, June, July … while completely brushing aside the fact that the rate in March 2022 is utterly inappropriate for March 2022.

This is just really bad monetary policy leadership.

4 thoughts on “Walk Softly And Talk With A Big Stick

  1. Jk says:

    The 2s10s is down to 15bps. The dollar is up to 1.10 to buy a euro and it takes 120 yen to buy a dollar. Raising rates can’t produce more oil but can only destroy demand. I think they are very worried about an inflationary recession

    1. Bill Terrell says:

      Right … I think some sort of slowdown is baked in the cake at this point. That’s not a Bad Thing though … from a Keynesian perspective when you’re going too fast slowing down is exactly what you need to do. If you’re barreling down the highway at 150 and slow down to 125 you’re still going pretty fast!

      Technically it’s still a “recession”, but hardly something to be avoided at all costs.

      It’s not a question of whether a recession happens, just what kind.

      Indeed the Fed can not increase the supply of real goods and services, it can only increase the supply of money availability to demand them with. Far as I can tell there’s no shortage of the latter.

      Demand destruction is just not a problem. Demand side economics – Keynesianism – just isn’t relevant here … the shortfalls are overwhelmingly on the supply side.

      In reality there never a shortage of demand anyway. Demand is infinite … human wants are unlimited. Demand can only drive up prices to the extent it is underwritten by currency with which to express it. And this is where the imbalance lies.

      I deliberately call attention to the short end of the yield curve in the context of mainstream obsession with the further out part. The yield curve is only shallow out past two years … short of that it’s very steep. I think most financial media is Wall Street biased and wants the easiest money possible and therefore focuses on the shallowest part to try and lobby the Fed for inflationary policy.

      But the bigger point here is that the Fed has become obsessed with predictability. It’s elevated policy expectations above that of actual policy. This is a form of ease in its own right … markets can leverage up more when they’re confident of short rates months ahead than when they’re uncertain. If Powell and company are truly serious about quelling inflation, their emphasis on monetary policy predictability is misplaced. Short rates wouldn’t need to rise as much if they were less predictable.

      Hike to 75bp now, for instance, maybe 125 next week … if warranted you can always cut the next week. It may shock the markets, but only because they’ve been conditioned to expect gradualism. Every move becomes a harbinger of more to come in the same direction. If that’s a problem, come right out and say you intend to change the way you’re doing business.

      To put things in perspective, the market has hiked the ten year yield by 66 bp in a mere three weeks. The notion that a 50 bp move in overnight rates is too much for the markets to handle in a six week interval between FOMC meetings or requires advance notice strains credulity.

      Powell could – and should – call an FOMC conference and announce an immediate hike to 1.50%. At the same time, also announce that no further moves are planned; the FOMC will simply review the data at each meeting and adjust upward or downward as circumstances warrant.

      My position here is far from extreme, by the way. Even some mainstream money managers have taken starker positions. For example Brian Wesbury and Robert Stein of First Trust call for the Fed to hike to 2% right now:


      … and start cutting the balance sheet by $100B a month immediately. We could quibble about some details, but moving to a let’s-focus-on-what’s-appropriate-right-now policy framework is no mere Finsterian fantasy.

  2. cb says:

    The FED is a scumbag organization manned by ……………………… scumbags. They are the manipulators for the club, as George Carlin would say, “you ain’t in!”

    They are ruinous to the true productive class,, the working class.