What does a “pissed-off” Jerome Powell look like?
Better yet… What does an angry FOMC Chairman do?
We’ll find out tomorrow when Mr. Powell announces the FOMC decision on interest rates for the first time this year.
The market does not expect any change in policy. Rates will remain the same, and the Fed will continue to monitor the data while leaning towards lowering rates later this year.
Of course, that’s assuming Mr. Powell will maintain his composure after being poked by President Trump.
Last week, in a speech to the crowd of elites at Davos, President Trump “demanded” lower interest rates. The President bragged that he knew more about interest rates than “the guy currently in charge of the policy.”
Those comments put Mr. Powell in a bit of a bind. If he talks about lowering rates, then the Chairman looks weak. He’s complying with the President’s “demand.” He risks being seen as a puppet.
On the other hand, Mr. Powell might express the normal human reaction to being called out. He might wave to the President – without using all five fingers – and then say something along the lines of…
“Really? You “demand” lower rates do you? You think you know more than me? Well… after looking at all the data, the evidence suggests there is a greater risk of inflation heating up again. The committee is reconsidering its preference towards lowering rates later this year. We may instead need to raise rates.”
That sort of statement would send a shock wave through the financial markets – not because anything has changed. Rates would remain the same. The future direction of rates would remain “data-dependent.”
But investors would now have to deal with a new layer of uncertainty. And, the market does NOT like uncertainty.
If we dig a bit deeper, though, this might be the reaction the President really wants. Let me explain…
The FOMC only controls the target for the Fed Funds rate. That’s the short-term rate of interest that banks charge each other on overnight loans. Long-term interest rates are a function of the market – the supply and demand – for Treasury bonds.
The Fed does NOT have direct influence over long-term rates.
The FOMC shifted to an easy money policy and began lowering its Fed Funds target last September. Since then, long-term rates have gone up. The ten-year Treasury yield is 4.63%, up from 3.65% in September. The 30-year yield is 4.86%, up from 3.95%.
In other words, the cost of long-term money – the kinds of loans that you and I and businesses use – has gone up since the FOMC began lowering its Fed Funds target. Lowering the Fed Funds rate has actually been restrictive for business.
Isn’t it possible that raising the Fed Funds target rate would have the opposite reaction? Could it lead to lower long-term rates?
Perhaps that is what the President is thinking. By “demanding” lower rates, by saying “I’m smarter than you,” President Trump has put the Fed Chairman in a defensive position.
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The normal human reaction would be for Mr. Powell to push back a bit. He might say some version of, “You can’t bully me. I’ll do what the data suggest I do. If the data suggest I should raise rates, then we’re going to raise rates.”
The market would likely react to that by starting to reverse the action we’ve seen in the Treasury bond market since September. Bond prices will rise. Long-term rates will fall.
And the President will get what he wants.
Best regards and good trading,
Jeff Clark
Editor, Market Minute
P.S. No matter what happens at the FOMC meeting, we’re still at the beginning of the 100 Most Profitable Days of Your Life.
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