Thoughts From The Divide: “Powell’s Last Stand?”

Over the last few weeks, we have discussed the Administration’s attempts to use staff selections to undermine Fed opposition to the WH’s preferred policy mix. One could argue (let the reader decide) that this is part of a broader strategy to use staffing decisions to increase WH (and MAGA’s) influence in policymaking (“TFTD: Personnel is Policy”). Viewed through this (cynical?) frame, observers might argue that a new front opened up in the battle of the Fed with the allegations that Lisa Cook committed mortgage fraud. We would argue that the appointment of EJ Antoni to the BLS was a new front: a flanking maneuver, designed to ensure that marginal (in the eye of the beholder) BLS calls tend to go the WH’s way. At the risk of contradicting Mr. Authers, the mortgage fraud allegations against Cook are a new tactic on an old front. Potato-potahto. Either way, while Mr. Authers used “startling”, we would describe ourselves as unsurprised: politics ain’t beanbag and the Administration was known to have sharp elbows. One might argue that it’s a symmetric response to Trump’s adversaries’ regular use of lawfare against him, but who can say? Perhaps the WH would have used this tactic regardless.

Reasonable people might consider Pulte’s allegations to be politically motivated. But that does not mean that we fancy Cook’s chances of surviving this. We sympathize with Cook, but the letter of the law is clear. While we suspect many people have done something similar, most of them were not Fed Governors, and their political adversaries do not run the DoJ. The situation reminds us in some ways of the USSR/CIS, where the selective application of laws was/is systemic. Regardless, the odds are that Cook is cooked, and that she would be well-advised to resign to avoid a ruinously expensive prosecution.

This would leave Powell chairing an FOMC where Messrs. Waller, Bowman, Miran, and Cook’s eventual replacement could potentially all dissent – so much entertainment! And potentially against the backdrop of Powell’s eventual successor sharing his/her opinion with markets.

It is now possible to see the outline of how fiscal dominance will be established: by running right over Powell’s opposition. So much for “Fed independence”. But the consensus was that Powell would not go down without a fight, and there was (well-informed) speculation that Powell planned to U-turn on FAIT. We were about to applaud Jerry’s guts, but having just listened to the speech, it appears that he is attempting to outflank the WH rather than meet it head-on. It seems Jerry took on board the lessons of history (Jackson Hole is 261 miles from Little Big Horn) and decided that not all “Last stands” are glorious.

Do we agree with Powell? Well, if the question is whether current conditions are inflationary, then the answer is yes. Fiscal policy still seems stimulative, and our forward-looking models point to inflationary basing. Of course, back when FAIT was announced, we said the same, and Powell was sitting in the same chair. If we were to take issue with anything, it’s the market’s assessment of Powell’s speech. Markets took this as a PACO trade (Powell always chickens out!), but if FAIT is reversed, then inflation is likely too high to cut. Still, these are thin summer markets, and traders probably expected more overt opposition from JP. Either way, this kind of pedantry does not win friends. Rather, we prefer to highlight Rudy Havenstein’s series of humorous observations about Jackson Hole. And to remind markets folks to pay close attention to the papers that will be presented.

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