Thoughts From The Divide: Deep Feelings

“I think we’re feeling good”

Powell was back at the pulpit this week, delivering what markets took to be a rather dour sermon, (some commentators used the term “clobbered”). The quick and dirty analysis was that the pain was caused by the Fed signaling “it would cut fewer times next year than previously projected”, but we were struck by the number of times that Powell’s comments were indicative of a Fed more dependent on what it feels in its water than data.

Having previously asserted that we will know the neutral rate “by its works” (reiterating the trope in this week’s presser) the Fed seemed pre-disposed to feelings-based reasoning. One example was saying that “we’re significantly closer to neutral”, followed by the assertion that “at 4.3 percent and change, we believe policy is still meaningfully restrictive”. Perhaps they might need to use “believe” a little less if they stuck to the hard and fast empirical data? On that note, Powell repeatedly brought up the uncertainty about the future of the economy, which was cited as the reason for caution. “It’s kind of common sense thinking that when the path is uncertain you go a little bit slower. It’s not unlike driving on a foggy night or walking into a dark room full of furniture. You just slow down”. But has the Fed now decided to transmit some of the uncertainty within its own numbers? Having previously argued that the Fed doesn’t consider hypothetical policy moves, it now appears that that is not a hard and fast rule. Discussing the potential impact of future fiscal policy (itself something that Powell has said the Fed does not comment on), he noted,

“… some people did take a very preliminary step and start to incorporate highly conditional estimates of economic effects of policies into their forecast at this meeting and said so in the meeting. Some people said they didn’t do so, and some people didn’t say whether they did or not.”

Yes, no, or maybe? Try all of the above! In the meantime, pressed on the potential for real wage growth to fade like a memory, Powell argued that the economy is one where “compensation is growing meaningfully faster than inflation” adding “we just want to hold on to it”… But… who is (theoretically) responsible for maintaining such an economy…?

All of this talk of feelings left us slightly perplexed. It seems an odd way to approach monetary policy, first, but more importantly, given the possibility that the Fed may be on a collision course with the incoming Trump administration, wouldn’t they want to be able to point to a clear and well-defined process to defend against any cries of playing politics? We, at least, wouldn’t want to show up to a knife fight armed only with a banana.

P.S. There will be no Thoughts From The Divide next week and we would like to wish everyone a very Merry Christmas and a Happy New Year.

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