The Trouble With Parsing Powell’s Words

Stocks had a nice Wednesday, and headlines seem certain there is one reason why: Fed head Jerome Powell. You see, he told Congress the Fed plans to keep rates near zero and quantitative easing (QE) going for “some time.” Allegedly, that means monetary “stimulus” will keep pumping indefinitely and investors can cross Fed pulling the punch bowl early off their list of fears. We have written many an article explaining why QE is more sleep aid than stimulant and won’t rehash that here. Even if QE and near-zero interest rates were a net benefit, we wouldn’t see much point in cheering Powell’s words. Forward guidance isn’t ironclad, and that goes extra right now for reasons we will explain.

Trying to predict Fed moves is never a productive use of time, in our view. For one, markets have no pre-set reactions to monetary policy decisions. Even more worrisome developments, like an inverted yield curve, usually impact the broader economy at a delay, giving investors ample time to judge each Fed move carefully. There is no need to make a knee-jerk portfolio reaction to an interest rate hike or cut, and even successfully predicting the Fed’s move won’t give you an edge.

That is good, because Fed moves aren’t predictable. They are data-dependent, as policymakers have reiterated time and again, but there isn’t a flow chart saying to raise rates if the inflation rate crosses above 2% or cut them if unemployment ticks higher. Heck, the Fed’s 2% inflation target is really nothing of the sort, as policymakers are aiming for 2% to be the long-term average. That gives them a world of wiggle room.

Compounding this, the Federal Open Markets Committee normally has 12 voting members—7 from the Fed’s Board of Governors and 5 from the regional Federal Reserve bank presidents. The New York Fed President has a permanent spot, and the others rotate in and out. So decisions are made by a changing cast of characters, each with their own biases, forecasts and unique interpretations of incoming data. That is not a market function. It is a messy human function.

Today, one seat is already open. But here is another fun variable: The Richmond, Atlanta, San Francisco and Chicago Fed presidents aren’t the only ones who will be off the FOMC next year. Vice Chair Richard Clarida’s term expires next January. He served only a partial term and therefore is eligible for reappointment, but we would be a tad surprised if President Joe Biden didn’t seize the opportunity to begin appointing his own picks. Joining him on the potential chopping block is … wait for it … Powell. His term as chair ends early next February, and it is anyone’s guess what Biden will do.

Powell was appointed by former President Donald Trump but has received favorable reviews from many on both sides of the aisle, and it isn’t unheard of for Fed heads appointed by one party to be retained by the other one. Ben Bernanke was George W. Bush’s pick, and Barack Obama reappointed him twice. His predecessor, Alan Greenspan, served under Ronald Reagan, George H.W. Bush, Bill Clinton and George W. The Trump decision to dismiss Janet Yellen (an Obama appointee) after one term is the exception, not the rule. Yet there are already rumblings that some Democrats will demand what they see as a more progressive pick. It is worth remembering Vice President Kamala Harris was one of the 13 Nays when the Senate confirmed Powell in 2018. Maybe the pandemic changed her view and others’. Maybe not. Maybe Biden will see the trouble his Office of Management and Budget pick is having getting confirmed as a sign a further left Fed nominee can’t pass muster. We just don’t know.  Neither does anyone building forecasts of Fed policy off of Powell’s words.

Call us crazy, but we think it is downright silly to say a guy who may not even be steering the monetary policy ship a year from now has perfect insight into what the Fed will do in 2023 and beyond. It is the epitome of unpredictable. So do yourself a favor: Save some energy and avoid playing the Fed guessing game. They will do what they do when they do it, and you will have time to weigh its impact and downstream consequences.