A picture is worth a thousand words

Stocks inched higher yesterday with a not-so-scary testimony from Jerome Powell. The guy wants more proof, but he likes what he is seeing – same story different words.

S’been a tough few years. The recent presidential debate gave us a good, if not entertaining, break from business as usual in the market. All the necessary debate-related discussions took place over 4^th of July barbecues during a weekend in which it was hard to determine which would cook faster your hotdogs on the grill or your buns on the beach. Your sunburn pain easing, and that topic of discussion fading have given way back to the long-in-the-tooth discussion around inflation, interest rates, and the master of ceremonies… The Federal Reserve Bank. Yeah, it’s back and in a big way. The Head Fed, Jerome Powell, gets to speak to lawmakers twice this week in what is likely to be his last appearance on The Hill before November’s Presidential Election. That means Senators and Representatives will have an opportunity to grandstand and pepper Powell with questions designed to trap him into saying something like “this guy is great, the other guy did nothing,” or vice versa.

We know that Powell is a pro, having survived in the corner office of the Fed through that guy’s administration and this guy’s administration… and a pandemic… and a boom-bust-boom-bust economic cycle. Powell is a master of words, rarely, if ever giving any information by accident. He is a man that sets the company line and toes it with deft. That said, even the most divisive lawmakers are no match for the Top Banker. But still, this is an election year, which adds another dimension to these testimonies. You see the Fed is an “independent” body, whose decision making is insulated from politics. Powell is, indeed, a republican, appointed by a republican. Despite this, the guy who appointed him has numerous times in the past threatened, and still today promises to replace him. What if the Fed just decided to cut rates by a full percentage point at one of the 2 FOMC meetings before November’s election? The market is likely to appreciate the gesture as would the half-strangled economy. Would that help the current guy in the polls? What if Powell does nothing and the economy slips further giving the other guy a boost in the polls?

You see, there are some unwritten rules at the Fed, but no one is really sure what those rules are. Those rules are in place to ensure that the Fed appears to be independent of politics. If investors and consumers believe that the Fed is political, it will lose its credibility. It is likely that those rules started out simply, like “no policy changes within 6 months of a major election.” But, of course, those rules have been modified, perhaps with the addition of “- unless absolutely necessary.” Under normal circumstances that shouldn’t be too difficult. Unfortunately, in the current, highly charged political environment, with an economy which appears to be approaching an inflection point, Powell and his minions are very likely looking closely at the words “-unless absolutely necessary,” and attempting to define the word “necessary.” No one wants to be remembered as the FOMC member that pushed the economy into recession… like all the others before. Recent economic data shows that the Fed’s policy, or just plain time 😉, has successfully caused inflation to slow and the economy (and employment) to cool? Will letting it cool for another 6 months until December’s meeting be OK, or will the economy stall and slip into a recession?

Perhaps the Fed can get away with simply talking about doing something, but doing nothing until after the election? Would that suffice? That would seem to be the path of least resistance. But really, what does Powell have to lose? If Trump wins, he has already stated that he would drop Powell when his term is up in May of 2026. Why not just give the market what it wants? No, Powell is a man of honor who is not going degrade the integrity of the Fed. He will try as hard as he can to abide by the unwritten rule. Powell is not in an enviable position at the moment. I will forego the typical charts this morning and post his official portrait from 2022 as well as an earlier portrait. I am sure that you will see the stark differences. I would imagine that if he sat for a portrait today… well, you know.

YESTERDAY’S MARKETS

NEXT UP

• Powell (That Guy in the pictures 👆🙃) will testify to House Financial Services committee starting at 10:00 Wall Street Time. Pay attention, please!
• More Fed talk from Goolsbee and Cook later in the session.