"Arthur Burns, You Are My Hero!"

Powell Proves Talk Doesn't Mean Action

“The FOMC [Federal Open Markets Committee] is strongly committed to bringing inflation down to 2 percent over time, and to keeping policy restrictive until we are confident that inflation is on a path to that objective,” [italics mine] Federal Reserve Chairman Jerome Powell said as recently as December 1. The tone was very different at his press conference on Wednesday.

“We believe that we are likely at or near the peak rate for this cycle,” he said after the decision to hold rates for the third successive meeting, indicating that the focus of the FOMC had switched from how much further to raise rates, to discussing when and how much to cut them. While not setting aside the possibility of rate hikes, the Chairman suggested that was not the likely next move.

What were some key data points that came out between Powell’s very different views on December 1, and those of December 13? The jobs numbers for November released on December 8 showed that average hourly earnings rose by 4% over the past year, similar to October, while the month-on-month change accelerated from 0.2% to 0.4%. That, if anything, ought to have put more uncertainty into the Powell message rather than move him to suggest policy easing.

And on December 12, we learned that the annual increase in core consumer prices (excluding food and energy) was stuck at 4% while the month-on-month change accelerated from 0.2% to 0.3%. These statistics also did not prompt the Chairman to adopt a more cautious tone about future policy changes! With Powell doing little to hold back euphoria in financial markets, the rally of the previous week gathered strength.

What could explain the switch in the Powell position? Is it the sudden realization that the next Presidential election, set for November 5, 2024, is less than a year away? The new President will get to either renominate Powell whose term ends in early 2026, or choose a successor. To avoid the inherent politics involved in the process, I have suggested several times that the Chairman’s tenure be for a single six-year term, making him / her ineligible for renomination. Little progress on this reform so far!

Or, was Powell’s shift occasioned by the not-so-subtle advice on Fed policy that he received from Treasury Secretary Janet Yellen a few hours before his press conference? Yellen told CNBC’s Sara Eisen, “As inflation moves down, it’s in a way natural that interest rates should come down.” This from a senior official in the Biden administration that prides itself in not commenting on, or interfering with, Federal Reserve policies.

Not surprising that when you pour gasoline, the fire burns even bigger. The equity rally that had started before Powell’s speech continued into the end of the week. All three major indexes posted their seventh consecutive week of gains, pushing the S&P 500 index up almost 24% year-to-date. The yield on 10-year Treasurys closed last night at 3.92% after starting the week 30 basis points higher at 4.22%.

What would be the macro implications of the Powell statements? Lower bond yields in markets, and indication of lower policy rates to come, will likely boost consumer spending by reducing borrowing cost. Already, we know that retail sales rose 0.3% month-to-month in November compared with the 0.1% decline that had been anticipated. In the presence of lower interest rates, the implied strong consumer spending will make it more difficult to mitigate inflation. The continued robust increase in wages will not be dampened by easier monetary policy.

And not that the Federal Reserve has attained its inflation objective, giving it the green light for easing. Just the day before the FOMC decision, officials learned that the core consumer price index (that excludes food and energy) rose by 4% over the past year, twice the pace that the central bank targets.

While Powell may have had his own reasons for not realizing — or at least, not acknowledging — the immensity of the rally that he had caused, others at the central bank have started to show concern. “We aren’t really talking about rate cuts right now,” John Williams, President of the New York Fed, told CNBC SquawkBox yesterday, seemingly contradicting the Chairman’s view. Williams suggested that expectations of rate cuts starting in March are premature. If he meant to dampen the rally, Williams did not succeed.

Powell has repeatedly tried to cloak himself in the mantle of Paul Volcker, venerated for slaying inflation in the 1980s as Fed Chairman by taking extremely strong measures during the Carter and Reagan administrations. While the comparison has helped Powell make public speeches, he seems more comfortable following in the footpath of Arthur Burns, a Volcker predecessor who presided over the inflation surge in the 1970s.

Dr. Komal Sri-Kumar

President

Sri-Kumar Global Strategies, Inc.

Santa Monica, California

srikumar@srikumarglobal.com

@SriKGlobal

December 16, 2023

Sri-Kumar Global Strategies, Inc. advises multinational investors and sovereign wealth funds on global risk and opportunities.  Dr. Sri-Kumar is regularly featured on business TV and Radio media, and is a frequent speaker in global financial centers on major topics that affect markets and investments.

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