The Fed’s Powell — A Single-Handed Volatility Producer

Why does this always happen on Fed Day? The head of the Federal Reserve, Jerome Powell, takes the podium at 2:30 p.m. EDT and says a couple of good things — like the central bank is going to bring the inflation rate down to 2 percent (okay, that’s a good thing: zero would probably be better, but let’s cut him some slack; 2 percent is the global target) — and markets rally. Everybody knew he was going to raise the target rate a quarter-point, to 5.5 percent, which I think is a good number. But, then, Mr. Powell talks, talks, talks, and then talks some more. That’s when stock prices and everything else starts gyrating wildly — mostly because people don’t know what he is saying. What does this guy mean? What is he talking about? Wages are too high. Then, they’re not. We could have a soft landing. But: Maybe not. We might have to raise rates more in the future. Or, then again, we might cut rates. We need higher unemployment. Actually, no, we don’t. I mean, really: The more he talks, the less sense it makes. He’s a single-handed volatility producer. At one point, he said we don’t see inflation coming down to 2 percent until 2025. And the market sold off 200 points. Then, he said something else — and the market came back. Who knows? I yearn for the days when Paul Volcker would blow cigar smoke at Congress and basically tell people nothing. That’s what a good central banker ought to do, tell them nothing. Here’s a thought: Keep your eye on gold and oil. Gold is a classic inflation indicator, telling you whether the dollar is fundamentally strong or weak. Gold was $1,600 last November, and today it’s just south of $2,000. It was up $11 today after the Fed rate hike. Maybe this is why the Fed keeps raising its target rate. It’s not a great sign for future inflation. Oil is up about $10, more or less, to $79 from $69. Some people think it’s going up another $10-$15. If so, that would raise the topline CPI. I’m being overly simplistic here, but you could do worse than just track gold and oil as indicators for interest rates, and inflation, and Fed policy. Another point I’d make is that the Fed’s so-called balance sheet — which is basically the portfolio of government- and mortgage-backed securities — is still too high. The peak was $9 trillion during the pandemic. It has dropped toward $8 trillion, but it was at just about $1 trillion not too long ago. I think the reason gold is still historically very high is that the Fed owns too many bonds and has printed too much money, even though it has been printing less new cash than before. Another point I’d make is that the Fed should not be targeting the unemployment rate, or wage rates, or the number of people working. Its job is to keep an eye on money and prices. If you’re worried about the economy, that’s a function of fiscal policy, i.e., spending, taxing, and regulating. The Biden administration has done way too much of all three. So, while jobs have recovered from the pandemic, wage rates are still underwater from high inflation, which is 16 percent above February 2021, Mr. Biden’s base month as president. Groceries are up about 20 percent and energy is up 30 percent. The Fed was late to the party. Now it’s catching up. The real interest rate on 2-year government paper is almost 3 percent. That’s okay. But the real yield on 10-year Treasuries is only 1.5 percent, which anticipates more stagnant economic growth and diminished capital formation. If Mr. Powell had a backbone, like Paul Volcker and Alan Greenspan, he’d be out there telling Congress to stop spending. He would suggest that limited government would grow the economy from the supply side. That would bring down inflation — permanently — because less money chasing more goods is exactly the right policy mix. So, the Fed should quit trying to control interest rates. It should reduce the size of its balance sheet and quit printing too much new cash. Congress should spend less, tax less, and regulate less. For this, we’d need a new cavalry. Actually, we’d need a whole new army. Give Bidenomics the funeral it so richly deserves. From Mr. Kudlow’s broadcast on Fox Business News.

The Fed’s Powell — A Single-Handed Volatility Producer

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