The games that the Fed plays
Abraham George Macro Musings
When Jay Powell took office in Feb 2018, he made a lot of contradictory statements and even had to withdraw a few. He is not a trained central banker but he learned fast. That the central banks are never trying to get things right but are always trying to influence public perception. At times, they even play bad cop - good cop games. You will hear one of the Presidents of a regional bank say something diametrically opposite to what the Fed Chairman says. It is all part of the game that they play in managing the economy.
After Wednesday’s Fed meeting, this is what Jay Powell had to say, “We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment both in terms of employment and in terms of participation.”
It is difficult to understand that a condition of maximum employment is necessary to clear the way for raising interest rates. The Fed is supposed to anticipate incoming inflation and act accordingly. But, they have another mandate to not unsettle the stock markets and keep us all in permanent paradise.
The unemployment rate from last month’s report dropped to 4.8%. Full employment is anything in between 4.1% to 4.7%. So we are pretty close. The Fed watches something called NAIRU (Non-Accelerating Inflation Rate of Unemployment). This is the level of unemployment, below which inflation is expected to rise. Common sense would dictate that this is not something to mess around in an economy that is already producing high inflation.
To put it in perspective, when the Fed started raising rates in Dec 2015 following the financial crisis and three rounds of QE, the unemployment rate was higher than it is now. Economic growth was lower, and inflation was much much lower.
If you have been watching the Fed closely, they are not trying to be right, they want to manipulate public perception in a way they can direct and navigate to execute on their objectives, without changing consumer confidence/behaviors and market stability.
So, we have to watch what they do and not what they say. Actually, if you go to see they acted on tapering, the emergency bond purchase program (QE) sooner and communicating a faster timeline than we would have expected a few months back. We can expect the same with interest rates too.
So, there we go. Thanks for reading Breezy Briefings. If you enjoyed this, I'd really appreciate if you could take a second and tell a friend. Honestly. It makes such a big difference.
Forward this email. Recommend the newsletter. Share on Twitter, WhatsApp, Telegram, LinkedIn, Slack, wherever!
Join Breezy Briefings’ Official Telegram Channel: https://t.me/BreezyBriefings
Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.