‘Fed watching’ is a big job at major international banks. Usually, the main guy will be an international economist with a PhD from a highly respected school. He would have previously worked at the Fed too. He has a team of assistants to dissect and interpret all Fed data. Remember the Fed employs thousands of PhDs in economics and other similar fields. This main Fed watcher and economist will not be the highest paid guy in the treasury department of the bank but he is certainly widely respected. He constantly meets with Fed officials to debate and discuss monetary policies and other matters mainly to understand the Fed’s mind on the way they see the economy moving forward and any upcoming policy changes.
When I was very active in trading, I met with at least two of these ‘Fed watchers’ in a month on average from different banks. That way, I got to learn how the Fed thinks and how to interpret many of their statements. All along from the last two years, I have maintained the stand that the Fed is playing foul with the ‘inflation transitory’ statement and finally they will backtrack on it.
Yesterday, as Jay Powell was testifying to the Senate Banking Committee, surprisingly he remarked that it might be time to ‘retire transitory’ as a descriptor of how the Fed views consumer price increases. Really? This brazen boldness indeed surprises me. It is Jay Powell who introduced this term into the financial lexicon last year. Language is a living, breathing organic thing. Under Powell, ‘transitory’ took a life of its own and it is going to be his legacy even after he leaves office. He is turning 69 in Feb and maybe his head is a bit twisted now to understand the difference between a 6 and a 9.
He emphasized further, “The threat of persistently higher inflation has grown. As a result, the Fed’s bond purchases might be wrapping up perhaps, a few months sooner than planned.” So we can put to rest the fears that I voiced in the report yesterday and continue to stick to our original line unless he flip-flops (again).
Let’s take a look at how the perception manipulation by Powell, I mean the Fed has evolved up to its latest change of mind. Throughout the year, as he defended the drumbeat of ‘transitory’, he told us that the deflationary trend of nearly four decades, just “doesn’t change on a dime”. He also told us that short-term inflation is simply a product of “bottlenecks” and “base effects”. He deflected responsibility on supply chain induced price pressures, saying the Fed’s “tools don’t do much for supply constraints”.
Then he comforted us by saying, “sure prices have soared, but transitory means they just won’t continue soaring at the same rate”. Meanwhile along the way, in the last 11 months, under the cover of the “no inflation problem” theme from the Fed, the politicians passed spending bills after bills totaling $7.4 trillion and another $ 2 trillion on the way.
All this time Powell has played along with the administration and Powell had kept himself running for another term as the Fed Chairman. Now that he is re-appointed, it doesn’t make sense to stick on to the ‘transitory inflation’ talking point far more than it should really have.
The lingering question is will Powell turn to be another Volcker or is he changing the perception on inflation and putting breaks to the government’s further plans on spending? Now that could turn out to be an inflationary bomb and can create unbelievable damage, from a policy standpoint for the US and the global economy at large.
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is setting up a hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.