The Breakdown - The Single-Mandate Fed Says There Are Too Many Employed People

Starting point is 00:00:00 the great irony of Powell's constant invocation of Volker this year, his great fear of his legacy as being another Arthur Burns, will be that his name will represent an entirely new type of cautionary tale. It won't be that he fell into the Bernsian trap of taking his foot off the break too soon. It's that he will have been so obsessed with the lessons of the past that he failed to recognize how fundamentally different the situation he was faced with was. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world.

Starting point is 00:00:36 The breakdown is sponsored by nexus.com, and FTCS, and produced and distributed by CoinDex. What's going on, guys? It is Thursday, September 22nd, and today we are discussing why the single mandate Fed is saying there are too many jobs. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation. Come join us on the Breakers Discord. You can find a link in the show notes or go to bit. dot LY slash breakdown pod. Also a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. Well, folks, yesterday was the biggest day of September for markets. It was FOMC day, the day where we would see if Powell and the Fed would meet expectations,

Starting point is 00:01:23 or erudovish or lean hawkish in helping guide markets about what was to come from monetary policy. We got some extra fireworks heading into the day in the form of an announcement that Vladimir Putin would be making a speech just hours before, just to really drive home the extent to which monetary policy, the macro and geopolitics are in the driver's seat right now. QE Infinity wrote, Putin's speech one hour before FOMC announcement, LMAO, good luck trading this. Now the speech ended up being moved around in terms of timing, but we still got it, and it was in short an increase in belligerence. Putin declared a partial mobilization, meaning that some 300,000 reservists could be called up.

Starting point is 00:02:03 One of the first groups to react was Russian men who raced to get out of the country before they could be called to serve. E. Rosalie, a disinformation studies researcher at Johns Hopkins, writes, Putin's canceled speech appears to have set Moscow ablaze with anxiety. For a hypothetical family of three, let's say a mom, a dad, and an adult son, a flight from Moscow to Istanbul is now approaching $3,200. A number of global news outlets are also reporting that Russian airlines, have been ordered to stop selling tickets to men 18 to 65, although I haven't been able to verify that in many U.S.-based outlets, so take it with a grain of salt. Putin also reiterated

Starting point is 00:02:37 a threat to go nuclear, which you think would be sort of a big deal, but the U.S. posture remains dismissive, which all I can say is I hope they're correct. David Sachs tweeted, we're on the escalatory ladder with a nuclear power. Every time we escalate the media cheers. Every time they escalate, the media calls it a bluff. Dangerous recipe. I think that may be a point worth marinating on. But markets basically shrug this all off in favor of the big Powell show, and so for now, so shall we. We've done a fair bit of lead-in to this particular FOMC decision. You've heard how even before the inflation print, when many were optimistic we'd see a continued downtrend in inflation, that the Fed was firmly committed to a 75-bases point interest rate hike.

Starting point is 00:03:19 After the surprise high inflation numbers for August, some started betting on a 100-bases-point hike, a full percentage point. But even that had settled down coming into this week. The conventional wisdom heading into the FOMC announcement was that if we got the 75 basis point hike as anticipated, markets would react bullishly with a slight relief rally. If on the other hand we saw a full 1% rise, markets might take another leg down. Former Treasury Secretary Larry Summers has continued his media tour, saying on Bloomberg TV, the FOMC has to keep recognizing that its objective is to minimize the total of unemployment, shuttered businesses and distress over time, and that keeping inflation under control and keeping inflation expectations anchored,

Starting point is 00:04:00 even if that's painful in the short run, is the most important way to do that. What I worry about is the FOMC will project some element of doubt and hesitancy around doing what is necessary, given the painful movements that have taken place in markets, and given that there has been some signs and slowing in parts of the real economy. I think showing clear determination is the best way forward for the FOMC. Now, what about Nick Timmerouse, the Wall Street Journal's Fed, whisperer that has become so assumed to be in the know that markets await his commentary almost as eagerly as Powell's. In advance of the announcement, he tweeted, most Wall Street analysts and

Starting point is 00:04:30 investors expect the Fed to raise rates tomorrow by 75 basis points, but some see a small chance of a larger 100 basis points of prize. If it's 75, the interest rate projections and implied peak rate will be a key focus. Said William English, a former top Fed advisor, they would only go to 100 if they saw a fundamental change in where they thought the economy and inflation were going, and I doubt one month of data was enough to do that. Once again, Timmerhouse would be a bit prophetic, specifically the line, if it's 75, the interest rate projections and implied peak rate will be a key focus. So let's talk about what actually happened. The Fed raised the policy interest rate by three quarters of a percentage point, or 75 basis points.

Starting point is 00:05:08 That brings the current target range to 3 to 3.25%. They, quote, anticipate that ongoing increases in the target range for the federal funds rate will be appropriate, and that, quote, the pace of those increases will continue to depend on the incoming data and evolving outlook for the economy. So along with the news, the intro speech gave much of the same. Strongly committed to bringing inflation back down to our 2% goal. Have both the tools we need and the resolve that it will take to restore price stability on behalf of American families and businesses. Price stability is the responsibility of the Federal Reserve and serves as the bedrock of the economy. Without price stability, the economy does not work for anyone. Without price stability,

Starting point is 00:05:44 we will not achieve a sustained period of strong labor market conditions that benefit all. Again, nothing new here just reiterations of their key goals. When it came to economic indicators, the Fed sees slowed growth from historically high growth last year. Indicators point to, quote, modest growth of spending in production. Growth in consumer spending has slowed from last year's rapid pace, in part reflecting lower real disposable income and tighter financial conditions. Activity in the housing sector has weakened significantly, in large part reflecting higher mortgage rates.

Starting point is 00:06:12 Higher interest rates and slower output growth also appear to be weighing on business-fixed investment. So what does this lead to for the Fed? Quote, since June, FOMC participants have marked down their projections for economic activity, with the median projection for real GDP growth standing at just 0.2% this year and 1.2% next year, well below the median estimate of the longer-run normal growth rate. Now, what about when it comes to inflation? What do the Fed have to say there? Quote, price pressure remains evident across a broad range of goods and services. We are acutely aware that high inflation imposes significant hardship as it erodes purchasing power

Starting point is 00:06:46 especially for those least able to meet the cost of essentials like food, housing, and transportation. We're highly attentive to the risks that high inflation poses to both sides of our mandate and are strongly committed to returning inflation to our 2% objective. The Fed's summary of economic projections sees headline PCE inflation getting to 5.4% by the end of this year, 2.8% by the end of next year, 2.3% by the end of 2024, and 2% by the end of 2025. So effectively, they're forecasting another two years of inflation fighting before they hit their target, but are forecasting that they could get it under 3% by the end of next year. It is notable that there is no sign yet of considering abandoning the 2% target.

Starting point is 00:07:25 Now, this duration of the flight against inflation was sort of the key piece. When it came to guidance, Powell said, We anticipate that ongoing increases in the target range for the federal funds rate will be appropriate. Restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautioned strongly against prematurely loosening policy. So what did this mean in terms of numbers? In the last three months, the Fed's projections for where the interest rate will be next year have moved up about a percentage point. They're now forecasting holding rates above 4% for

Starting point is 00:07:54 2023, with the median at 4.6% at the end of next year, and then only seeing rate cuts in 2024. All bar one member saw rates at between 4.25 and 5% at the end of next year. As we'll get into during the commentary, this is a pretty big shift. Their conclusion, to conclude, we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals. Reducing inflation is likely to require a sustained period of below-trend growth, and there will very likely be some softening of labor market conditions. Restoring price stability is essential to set the stage for achieving

Starting point is 00:08:34 maximum employment and stable prices over the long run. Now, overall, this speech was not very Fed-speaky as Fed speeches go. It was much more blunt and to the point. This tracks with a shift in strategy that, again, Nick Timmeros noted in a piece that he published a few days before the FOMC. On September 19th, he published a piece called Jerome Powell's inflation whisperer, Paul Volcker. The real revelatory detail was that in advance of his Jackson Hull speech, which ended up being a very short, punchy, eight-minute speech, Powell had written something entirely different. However, given how much the market dissect every single intonation of every word, he says, he wanted to be as crystal clear as possible and scrapped it in favor of the short speech

Starting point is 00:09:12 we got. Timurow summarized the message of that speech being, quote, the Fed would accept a recession as the price of fighting inflation. Nexo is a security first platform built for the long run with everything you need for your crypto. Five key fundamentals, including real-time auditing and insurance on custodial assets, safeguard your funds, making Nexo the right place for you to buy, exchange, and borrow against your assets safely. Learn more about Nexo's reliable business model and start your crypto journey at nexo.io. That's nexo.io. Eager to make more informed decisions around crypto, chainelysis is here to help. Chainalysis demystifies cryptocurrency by providing industry-leading compliance, market intelligence, and investigations support for all crypto assets. For organizations

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Starting point is 00:11:09 nailed this one. On September 20th, he wrote, this FOMC should be unusual. The dots are more important than the hike itself, as the dots provide with a path for rates. If we see 4.5% are over on the dots for 2023, dump it. Then summarizing up in the wake of the announcement, he wrote, FOMC over, heavy two-way volatility. Price is slightly lower. 75 basis point hike, dubbish. Higher than price dots, hawkish. Presser, neutral. Indeed, the dot plot was what most people were paying attention to. Jim Bianco wrote, this is a massive move in three weeks, up 75 basis points on the terminal rate, 3.83% to 4.61%. A big change in the outlook of Fed policy. A quick aside for those not familiar with these terms, terminal rate, meaning where the Fed ends up anticipating

Starting point is 00:11:55 the highest federal funds rate to be in this tightening cycle. Macro-Aulf writes, this dot-plot update is massive. 12 out of 19 FOMC members expect Fed funds between 4.5 and 5% by the end of 2023. Fed pivot my ass. Jason Furman, an economics professor at Harvard writes, the FOMC raised rates by 75 basis points to 3 to 3.25%. This was expected. Market seems surprised by the dots. They show rates rising to 4.4% at the end of 2022 and 4.6% at the end of 2023. Good to move expectations towards something more realistic, but I still expect the federal funds rate to max out around 5.25%. And what about old Larry Summers, given that he's got so much attention for telling Powell how to do his job. He tweets, The Federal Reserve is continuing its

Starting point is 00:12:39 adjustments towards reality, with rates predicted to rise to 4.6% in 2023, slower growth and higher unemployment. Good to see, but we are far from out of the woods. Glad to see firmness of commitment to disinflation. I hope Federal Reserve will do what is necessary to contain inflation. I suspect it is still, as for the last 18 months, more difficult to hold than they recognize. The Fed is projecting 4.6 Fed funds at end of 2023. If this happens, I expect the rate will have been higher during the year. So the Fed's implied expectation for the terminal rate must be very much in the range of 5%. Encouraging, but not sure, fully grasped by the market. Chairman Powell is very thoughtful at press conferences, but I wonder whether the Fed's credibility

Starting point is 00:13:15 is well served by frequent hour-long dialogues on hypotheticals and the unforecastable, with the backdrop of gyrating markets. Between press conferences and dot plots and minutes, the Federal Reserve should consider the idea of TMI. Still, for my money, when it comes down to it, the most dead-on take comes from Joe Wisenthal. Going back to that Timrose article for a minute, Nick effectively argued that because of unemployment being at generational lows, the Fed functionally has just one mandate to kill inflation. Joe took this a step further, though, I think correctly, identifying that it's clear for the Fed that at this point, the labor market isn't just something they're willing to sacrifice a bit, but instead,

Starting point is 00:13:51 it's actively the enemy. In the market's newsletter this morning, he wrote, There were three moments that really stood out to me. Each one of them deal with the centrality of the labor market tightness to the Fed's thinking. Joe points to first, quotes from Powell during his introductory remarks, whereas Joe puts it, he notes that yes, there are clear signs of rate hikes having a slowing effect, but that labor market's strength or tightness has remained stubborn. Joe goes on. Next is a part where the kids might say that Powell said the quiet part out loud. Quoting Powell, he writes, you know, we're never going to say that there are too many people working, but the real point is this. Inflation, what we hear from people when we meet with them is that

Starting point is 00:14:26 they are really suffering from inflation. And if we want to set ourselves up, really, really light the way to another period of a very strong labor market, we have to get inflation behind us. The final point for Joe came in response to a question from Fox business on how long Americans should be expected to feel the pain. Powell said, long? It really depends on how long it takes for wages, and more than that, prices to come down for inflation to come down. Joe sums up, it's always been the case that monetary policy mainly works by cooling demand, which means a trajectory of lower wages and fewer jobs. But now is making it crystal clear that the path to fighting inflation starts by hurting labor. If somehow

Starting point is 00:15:00 inflation cools on its own without a significant rise in the unemployment rate, well, that would be lucky, but it's definitely not the plan. Scanda Amernath from Employerica put it more bluntly. He writes, An unemployment rate that rises from 3.5% to 4.4% is not an unemployment rate that peaks at just 4.4%. I think everyone should assume the Fed is committed to engineering a recession. To put it even more bluntly, Jeff Ross from Vailshire Capital writes, Fed logic. Poor people are being hurt badly by price inflation. Therefore, we need to slow down the economy and worsen economic conditions which will force

Starting point is 00:15:32 businesses to fire employees. If lots of people get fired, they won't have money to spend so the cost of goods will decrease. To put it even more bluntly than that, again from Alex Scribes, Kruger. Another Powell gem from today. Substantial savings can still be seen on people's balance sheets. He wants people's savings gone. And to put it blunt as the vall, Sven Henrik of Northman Trader, Fed. We're helping the consumer with inflation by getting as many of you unemployed as possible. Now, let's hold aside the ethical discussions of economic austerity. I think if this is the Fed's strategy, which all indications seem that it is. It's reasonable to ask the Fed what their theory on why unemployment is at generational lows is.

Starting point is 00:16:10 There are vague references to the idea that it perhaps has to do with a problem of participation, a problem which is presumably structural and caused by larger shifts in the tectonic plates of the economy following the pandemic. And yet if that is the case that the reason for the tightness in the labor market is about something other than just normal market cycles, something that has fundamentally changed in the last few years, is it really the right idea to combat that with a brute force attempt to use an old set of tools to impose more unemployment? How sure are we that these tools can actually solve the problem? Jim Bianco gets at this. He writes,

Starting point is 00:16:41 Let me remind you what the weakest assumption is in the market, that this inflation is a one-time rise because of the shutdowns reopenings and will go away for good in 18 to 24 months. Then we can return to 0% with more printing and soaring market indices. I've argued that this is a post-pandemic economy and that what drove inflation to 2% and stay there for decades was cheap labor, cheap goods, and cheap energy, mainly via Russia. All of these eras ended, and now we are in an era of persistent inflation. Only when we recognize this is a new era and get about restructuring the economy, can we return to low stable inflation again.

Starting point is 00:17:14 This will take many years and trillions of dollars. But we are not starting this restructuring. Instead, we would rather argue whether this is a post-pandemic at all and prefer to ask when the economy is, quote, returning to normal. This is normal now. Porter Collins of Seawolf Capital also sums it up nicely saying the Fed is once again falling into the trap of fighting the last war. Now, as for me, I believe that when the history books are written,

Starting point is 00:17:37 Basically, whatever happens from here, the great irony of Powell's constant invocation of Volker this year, his great fear of his legacy as being another Arthur Burns, will be that his name will represent an entirely new type of cautionary tale. It won't be that he fell into the Bernsian trap of taking his foot off the break too soon. It's that he will have been so obsessed with the lessons of the past that he failed to recognize how fundamentally different the situation he was faced with was. In 2021, the Fed didn't start tightening soon. enough because they were reading the lessons of the global financial crisis, where the recovery didn't reach lower-income workers for quite some time. And so, to use their own words, let it run hot.

Starting point is 00:18:17 In so doing, who knows how much they contributed to this overheating. In 2022, as the Fed tightened, it kept pounding and pounding and pounding, justified by the lessons of the 1970s and the, quote, continued tight labor market, without ever really taking the time to try to understand or even theorize why the labor market was tight. I believe, as I said, whatever happens from here, those will have been his errors and his failures. The only question now is for how long he'll continue to make them. I want to thank my sponsors nexus.com. And thanks to you guys for listening.

Starting point is 00:18:52 Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital. economy with traditional finance. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at coindesk.com slash ideas.

The Breakdown - The Single-Mandate Fed Says There Are Too Many Employed People

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