–Between Patience and Prudence As Payrolls Soar
By Denny Gulino
WASHINGTON (MaceNews) – You might have noticed a certain against-the-grain skepticism reflected in our coverage of the Fed in December and early January, during those volleys of attacks on a seemingly naïve and misguided Federal Reserve Chairman Jerome “Jay” Powell.
About those attacks, in some quarters they comprise an episode called “The Pounce,” when a certain subset of Fedwatchers sense an opportunity to test a new chairman. Powell, after all, had talked about “auto pilot” and opined the Fed could overshoot on rate hikes, and he had said rates were still a ways off from neutral.
The attackers pounced. The December Federal Open Market Committee meeting had issued a statement that was somewhat streamlined and uninformative. Powell’s post-statement press conference helped set the stage for the attackers to erupt with a plausible narrative that, it turned out, was based on very little in the way of facts and a lot on the enthusiasm of some Fedwatchers for an effort to rattle the Fed.
Suddenly, it seemed watching CNBC and the Fed flamers the cable channel fanned, that Powell caved and suddenly saw the wisdom of espousing “patience.” New York Fed President John Williams was mindful of his role as Fed ambassador to the markets, rushing in with solicitous, reassuring language to the same effect.
Then arrived the Jan. 9 FOMC minutes of that mid-December meeting. That document did not quite fit the “Powell caves” narrative, since it showed the FOMC members had – 20 days earlier – already been prepared to be “patient.” In addition, FOMC participants back then had already judged policy “to be at or close to the lower end of the range of estimates of the longer-run neutral interest rate” so that too was nothing new.
Is there a distinction to be drawn between a Fed chairman who suddenly recalibrates his views to meet market concerns and a Fed chairman who merely recalibrates his description of what he and his colleagues had already decided? Such a distinction could have big implications for what Powell and his colleagues do next.
The Fed can’t be expected to confirm a certain astonishment on the part of Powell when the attacks started. The chairman knew the data showing the underlying strength of the economy. He was soon to witness a December jobs report, at that time before revision, with more than 300,000 additional payroll slots. Who could question a Fed leaning toward a continued series of small rate hikes in the face of a jobs report like that? A lot of people, it seemed.
Powell, though, read the prevailing winds and doubtless after having commiserated with his colleagues including Williams, perhaps decided to play along for now, while being careful not to be too explicit about what the Fed might actually be in position to do throughout the rest of 2019.
For the Fed flamers, things began to fall apart as the data and the markets seemed to back away from any recession cliff more and more definitively as the early days of 2019 passed. While not abandoning their victory, having seemingly intimidated the Fed, they nevertheless became less and less triumphal.
The counternarrative continued to take shape and little by little creep into the conversation. The January narrative transformed from one of an intimidated Fed to one that saw the flamers had been either wrong or vastly premature. For many, then, it began to seem the Fed had caved too soon.
Another jobs report eventually arrived, again with more than 300,000 establishment survey additions to payrolls. The December report was revised down sharply but even so, was left with a very healthy payrolls total. When was the last time you could subtract 90,000 paychecks and still end up much better than 200,000?
To skip farther ahead and ignore somewhat tedious detail, the questions became who said what when and at what point which cable TV Brainiac was so certain, and less certain later, and then silent on the subject? Did the comment during that Jan.30 CNBC interview sting at least a little, when Gary Cohn formerly of Goldman and the White House observed, “CNBC seems to be obsessed with recession. I am not obsessed with the recession.”
The questions became, did Powell’s trial by fire actually leave him stronger? Is he in a position of being more persuasive with his colleagues now that they have seen fury fade and calm return? Does a close examination of his actual words show he conceded very little even under fire? Are his colleagues on the FOMC a little more battle hardened, less inclined to bend with the wind from now on?
Does anyone imagine Powell gave President Trump, in their dinner meeting Feb. 4, any kind of commitment? The Fed readout said otherwise, with Powell telling Trump and the Treasury secretary the meaning of data dependency.
Powell’s practical streak, his studied unwonkiness, his fixation with shoring up support via a steady stream of Capitol Hill contacts, might in the updated post-attack might even seem capable of a jiu-jitsu kind of flexibility in which he yields just enough to draw his critics into overstatement – and in time regret.
Powell confirmed in his Jan. 10 appearance before the Economic Club of Washington, when he was interviewed by co-founder of the Carlyle Group David Rubenstein, that he has always had the odd facility of being able to easily visualize and spell words backwards. Could he be leading a Fed that is ambidextrous, able to bunt a pitch defensively with one arm and with the other, swing aggressively? This is the year we might find out.
But wait. How important is it really whether the Fed does one, two or more quarter-point fed fund hikes this year in the context of what else is happening – or could happen? Is the Jan. 30 FOMC view that , “In light of global economic and financial developments and muted inflation pressures, the Committee will be patient,” actually all that appropriate in an era of blockbuster jobs reports?
At this writing, following a retail sales report’s unwelcome blast from the past, a belated December reading of a decline of 1.2%, the 10-year yield is 2.660%. On December 19, the end of the FOMC meeting, the 10-year yield was 2.777%., an easing of 117 basis points.
On the short end, the three-month Treasury is at 2.433%. On Dec 19 it was 2.402%, an easing of 31 basis points. Obviously December’s rate hike for overnight borrowing has had no broader effect.
There is currently positive market skepticism about both the possibility of another imminent government shutdown and the chance the trade dispute with China will ratchet up more intensely in two days. No shutdown and extended trade talks sounds like great outcomes for now. Certainly compared to a doubling of punitive tariffs on Saturday.
Yet Powell’s Fed has to face the reality that it may not indefinitely enjoy the luxury of “patience” in either direction and will need to react abruptly to rapidly changing circumstances, if not this weekend or March 2, then in two and a half months. Or when the now traditional debt limit battle comes to a head. Or when government funding runs out again in September, or when these and other crises overlap quite apart from the evolution of the business cycle or the mood of the markets.
Then it will be necessary to reach decisions in the midst of what might be market maelstroms. What kind of Fed chairman will emerge then? What will be the “backbone quotient” of his FOMC colleagues. This also may be something we’ll find out this year.