Powell's Cosmic Confusion: Fed's Stumble Leaves Markets Searching for Clarity
Abraham George Macro Musings
Federal Reserve Chairman Jerome Powell finds himself caught between a rock and a hard place, grappling with a dearth of independent thinking and a foggy outlook on what lies ahead. Recently, at the conclaves of the Jackson Hole gathering in the scenic embrace of Wyoming, this is the verbatim of what he uttered:
"As is often the case, we are navigating by the stars under the cloudy skies. In such circumstances, risk-management considerations are critical."
In isolation, adopting such a perspective isn't entirely off the mark. There's a certain charm in admitting the expanse of one's ignorance. However, when woven into the tapestry of Powell's track record as the chief orchestrator of the Fed, his words border on the ludicrous, leaving us with a taste of slapstick and an abdication of his role. None among us anticipated that he'd pivot from central banker to astrologer or navigator. Our craving was a simple one: an unvarnished truth, a rarity we were often denied.
I hold a certainty that he's well aware of the protracted stint he spent maintaining rates at near-zero, an indulgence that extended from 2021 to the unfurling months of 2022. Although he might abstain from openly conceding the point, I'd wager he'd hesitate to contest that his policies stoked the roaring flames of inflation that have since scorched the United States. Throughout, he serenaded us with assurances of transitory inflation. Yet, when we raise our magnifying glasses to scrutinize his risk management acumen, it appears conspicuously absent.
Pray tell, where did his vigilant risk management retreat when the Fed luxuriously embroidered another trillion dollars onto its balance sheet during the same epoch?
Grant him his due credit for acknowledging the Fed's crystal ball as rather murky, but let us not hesitate to hoist him upon his own petard when the central bank's proclamations are held aloft as unassailable truths.
Despite the robust crescendo of interest rates, the robust performance of the US gross domestic product this fiscal cycle, and the lean roster of the unemployed, the Fed appears ensnared in a labyrinthine quagmire of bewilderment. Their cherished aim of cultivating a 2% inflation rate seems as attainable as chasing a mirage across shifting sands. Permit me to quote Powell verbatim:
"These uncertainties both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little. Doing too little could allow above-target inflation to become entrenched and ultimately require monetary policy to wring more persistent inflation from the economy at a high cost to employment. Doing too much could also do unnecessary harm to the economy."
Read those words once more, if you will, and marvel at the carnival of confusion within the hallowed chambers of the Fed. This verily underscores the necessity of cultivating an autonomous judgment, casting aside the financial fortune-tellers and their misguided alchemies that could very well undo your monetary mirth.
While Powell plays the aloof card, Madame Lagarde extends her hand to assure us that no matter the cracks they introduce to the financial facade, they will be at the ready to wield the mason's tools, attempting to mend what they've so blithely shattered, all in the name of wrangling unruly rates.
Finally, in this symphony of grandiloquence, the most dulcet tones are offered by none other than the steward of the Bank of Japan, Kazuo Ueda. He proclaims with a measured nonchalance that Japan will unfalteringly serve as the last line of defense. Their dance with the unconventional, a harmonious ballet of ultra-easy policies and a debilitated yen, will endure. Their intent? To ensure that the tightened corsets of their G7 counterparts don't unleash a tempest, blowing apart the delicate fabrics of global sovereign debt.
The normalization of rates on the American and European stages finds an enigmatic conductor in the BOJ, weaving an intricate choreography to which we find ourselves mesmerized. These whispered assurances are the genuine treasures unearthed from the fertile soils of Jackson Hole.
But why, you might ponder, is Japan extending such a lavish olive branch to the West? The answer unfurls like a parchment, a testament to the grand waltz of international finance: the world acquiesces, granting Japan the coveted green light to dabble in the art of yen devaluation, to softly inflate away the colossal weight of its debt, and thus, with the gentle fan of a weaker currency, enhance its standing on the global stage.
I've tarried in this realm for nigh on decades, and I know the script by heart, the way this tale is artfully performed and orchestrated.
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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.