Fed Thoughts: Song of the Thin Man

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Fed Thoughts Dec 2017

Vincent Reinhart

Vincent Reinhart - Chief Economist & Investment Strategist

The news that President Trump picked a thoroughly conventional candidate to head the Federal Reserve next year was reassuring. Our initial reaction was that Fed-chair-to-be Powell not only looks the part of a central banker, but also showed financial acumen in "My Man Godfrey," keen insight in "The Thin Man" and its sequels, and a real knack for dealing with difficult colleagues in "Mister Roberts." Those are important qualities for someone guiding members of a committee who are sometimes difficult and always disputatious to a conclusion and then communicating the choice to a wider world. To our initial disappointment, though, someone explained that the actor William Powell died in 1980 and that the nominee is actually Jerome, "Jay", Powell, a current Fed governor and former Bush (senior) Treasury official. The consolation is that the younger Powell showed the same attributes of the elder during his career, but it is disappointing that Myrna Loy will not be at the Fed’s Fourth-of-July party. (Someone else subsequently relayed the bad news about Ms. Loy’s death in 1993. It is a colder world all-around.)

We were apparently not alone in being initially confused about the choice. Indeed, many market participants still seem confused, in that they assume that Powell will deliver dovish policies and make no more than cosmetic changes in the Fed’s monetary policy process. True, Powell did not come across as an agent of change at his confirmation hearing. Rarely does anyone on that side of the green felt table get past anodyne on those occasions. The reality is that Powell is a pick to the right of the incumbent on monetary policy inclination and engineered difficult changes in a hidebound institution in his term at the US Treasury.

As for monetary policy, Chair Powell is likely to follow through on the guidance the Federal Open Market Committee has routinely been providing for 2018. With resource slack probably exhausted and aggregate demand expected to grow at a pace faster than that aggregate supply, three-to-four quarter point firmings currently seem appropriate, as in the Standish forecast. Those moves depend on the data, of course, and are not priced in futures. Indeed, about one-third of the probability chips currently in fed funds futures are placed on fewer actions. Even though the macro forecasts of the Fed and most market participants seem aligned, market expectations track below FOMC guidance for the first year of Chair Powell’s tenure in the same manner they did for all of Chair Yellen’s leadership. We think that the former is a mistaken extrapolation of the split personality of policymaking that produced the latter.

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