https://www.reuters.com/world/us/ny-feds-williams-balance-sheet-run-off-could-start-soon-may-2022-04-02/
I was
checking the financial news feeds yesterday morning and found the attached 2
articles. The Bloomberg article continues the discussion on the inverted
/inverting yield curve which is a pretty good advance warning sign for
recession. The second, Reuters article, involves one of the Fed’s presidents, John
Williams, and his views on Fed actions and reactions. Both are good for
different reasons.
The
Bloomberg article is highlighting that many in the financial community are
feeling the Fed needs to get the Fed Funds Rate up now to help bring inflation
down. Talk of .50% and even .75% increases are now routinely discussed where a
.75% increase wasn’t considered at all until recently. The purpose of the
increases is to brake and break inflation. To brake the rate of increase and to
break the rate down from the current 7.5% annual rate that is increasing, to
the Fed’s long term target annual rate of around 2.0%. The article is showing
that more and more groups are calling for higher and faster rate increases. The
final paragraph in the Bloomberg article does a pretty good job of summarizing
the possible outcomes of this - “It’s
not a done deal that we are going to have stagflation or a recession but we are
getting close,” said Jake Remley, a senior portfolio manager at Income Research
+ Management, which oversees about $92 billion. “That inflection point is out
there somewhere, and it’s possible that at some point we may hit it soon if
they keep pushing the expectations for [Fed Funds Rate] hikes.”
The
second article from Reuters is a summary of comments by John Williams, one of
the Federal Reserve Bank’s presidents. Williams is responding to questions
about Fed intentions. It is not uncommon for various Fed bank presidents and some
others to make limited statements about current Fed thinking or activities.
They very seldom make a definitive statement and usually don’t say much more
than generalities however, and this is very much on purpose. They sometimes use
these types of settings to get a feel for what the thinking is in the markets.
It is an interesting dance, the Fed tries to make calming statements with
little or no content and then tries to “read” the comments from the market to
see what the market may be thinking or may do. The market meanwhile tries to
“read” what the Fed is saying (as the Fed tries not to say much) and get more
information out of the limited statements. The reason for this dance is that the
market can react very quickly to any information or direction it “thinks” is
important. The Fed doesn’t want to diminish its ability to influence markets by
telegraphing their plays. We had this problem in the 1970s-80s with Alan
Greenspan and the raging inflation and interest rates of that period. Greenspan
would share what he was thinking (kind of like thinking out loud, not necessarily
concrete, more exploring several ideas,
we all do it) with some of his people or
other governmental people, congress etc. and within hours (sometimes if felt
like minutes) the markets would have gotten hold of the information and reacted
in some way or other. Greenspan finally had to stop saying anything just so he
could think through things. That basically has carried over through all Fed
officials since then, they don’t dare say anything before they want to act
themselves. Remember, everything in the market is about information and
perception or worse perceived information. Williams, as reported in this
article, spent a little time relating past performance of Fed policies (in the 2019
Fed actions) that were viewed by the Fed
as being successful. Now if I was going to say that last statement as proper
Fed-speak I would say something like; Many individuals in the market and government
perceived our actions (Fed actions of 2019) as being somewhat successful and we
believe given current conditions which may or may not be similar to conditions
in 2019 that the Fed may be successful or not in doing something similar though
not necessarily the same again, i.e. slow the economy without crashing it
(recession). Do you get the idea. The article reports that Williams gave some
general rate targets and hinted that the Fed might consider (the next section is
my words not Williams but you get the idea)…., trying but may not try, still it
might work, but there are no guarantees, but maybe….. something “like” the
previous actions might, or possibly might not do something similar or not, in
the current situation that may or may not be like the previous situation,
maybe. Do you get the drift of the depth and breadth that the Fed people will
go to to say something but not say something. The article goes on to say
Williams suggests the high inflation rate is currently the “greatest challenge”
for the Fed at the moment (which may or may not change) - nothing is ever a
problem, just a challenge, and lists several factors likely influencing the
current inflation trends. Notice in the list nothing is said about the Fed’s
massive balance sheet which in my mind is the 900 lbs. gorilla in the room.
Williams does acknowledge that the Fed is going to try to “ease inflation to around
4% this year and ‘close to our 2% longer-run goal in 2024’ while keeping the
economy on track.” With inflation currently running at 7.5% and climbing that
is a good goal. The trick to the whole thing is in Williams’ quoted remarks in
the last paragraph, “These actions should enable us to manage the proverbial
soft landing in a way that maintains a sustained strong economy and labor
market”. That is really the goal, hope, prayer and fervent wish – a soft
landing of the economy. The success rate of soft landings is, unfortunately,
not particularly good.
Stay
tuned to the exciting continuation of the US Fed and the fight with the dragon of
inflation. The year 2022 promises to be interesting (not problematic, of
course). Think of the 1965 movie Those Magnificent Men in their Flying
Machines. The first 3 lines of the theme song describe our likely market
ride as the Fed attempts to bring the economy in for a “soft” landing. Think of
the Fed as the pilot and the economy as the flying machine.
from Those
Magnificent Men in the Flying Machines theme song
… and up and down and up and down and up.
As the stewardess says, everyone please fasten your
seatbelts we are entering turbulent weather.
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