Thoughts From The Divide: Why Now?
“The economy is not sending any signals that we need to be in a hurry”
Because motive is one of three elements of any crime, “cui bono?” is often useful as a quick and dirty tool for understanding events and the narratives around them. Another excellent analytical device is to ask, “why now?” These thoughts popped into our heads several times this week as we listened to Jerome Powell and his Fed friends recite the gospel of central bank independence. See the opening question from Powell’s interview in Dallas yesterday or the speech given by Fed Governor Kugler, “Central Bank Independence and the Conduct of Monetary Policy”. Subtle! Admittedly, the discussion of Fed independence isn’t anything new. As this article notes, “The Fed’s rapport with politicians has ebbed and flowed ever since its birth in 1913. In the words of former Chair, William McChesney Martin, the central bank is ‘independent within the government, not independent of the government’.” Jeanna Smialek, the source of our opening quote a few weeks ago, offered a slightly modified version in her article discussing why, though “central bankers say they ignore the political calendar when they weigh their decisions” (noble of them!), “lowering borrowing costs this close to an election inevitably injects the Fed into the campaign.”
Since then, and following Powell’s blunt “No” when asked if he would step down should Trump ask for his resignation, it is perhaps only logical that Fed members would stick to their mantra as their jobs may depend on it! Having stated that he feels he should have a “say” in the Fed rate decision and put pressure on the Fed during his first term, Trump may want to clean house. It’s hard to rule this out, given the latest appointments of Gaetz, Kennedy, and… Musk?
But while the continued talk of central bank independence is perhaps part of a career protection strategy, what if… it’s because the independence is about to be tested, not for political, but for economic reasons? What if Powell and Friends were thinking about pressing the brakes while Trump and Team want the accelerator to be the pedal of choice? (There is a winner according to Mosler…) Following Powell’s comments yesterday that the economy gave Fed some breathing room in cutting rates, short-term yields jumped, and markets moved to price in a less than 60% chance that the Fed would cut in December as opposed to a better than 80% chance that was priced in Wednesday. So, we can already see the brakes getting tapped.
Perhaps the market believes the Fed will show resolve should inflation return (both PPI and CPI came in hotter than the 2% target this week, though the usual hem and haw around the details made an appearance). But is it hard to take Team Transitory that seriously? Seems like they have a plan to stick to their guns, but with Iron Mike returning to the ring this weekend, we are reminded once again that plans don’t tend to survive first contact.
(The entire story arc from which the comic above is drawn is worth a moment for a laugh or two)
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