Pendulum Has Swang
Macro Perspectives: Thu 02 Dec 21
Let’s continue the theme on Jerome Powell's flip-flop on inflation. He now sees an "accelerated taper" and the risk of persistently higher inflation, with the pendulum swinging from inflation denier, to inflation fighter - just like that.
As we discussed, perhaps he spent the better part of the year manipulating the narrative on inflation, in a way that would win him another term under the Biden administration - an administration with an agenda to carry out, which clearly would be burdened by a Fed inflation fighting campaign.
We also discussed a second/related motivation for Powell: With a successful re-appointment now in hand, flipping the script on the inflation situation will make it much more difficult for the Democrat controlled Congress to justify the final fiscal spending bazooka (i.e. the transformative "green" and social spending plan).
With that in mind, Yellen and Powell spent yesterday testifying to the House Financial Services committee.
While Powell was under the gun for his prior denial of inflation, the House Republicans went on the offensive against Yellen (Biden's Treasury Secretary) - utilising their new-found leverage on the inflation situation to weaken the administration's pitch for another multi-trillion dollar spending package.
Bottom line: This dynamic of the past two days is increasing the probability that the monetary and fiscal liquidity spigots are possibly now closed.
Markets are reacting, accordingly.
Except for the bond market - the 10-year yield continues to slide lower, following the Thanksgiving evening news of the virus variant. The uncertainty here continues to be weighed more heavily toward "what the government might do," rather than "what the virus might do."
With that, under Powell's new inflation stance, he views any uptick in restrictions as more inflationary - as the supply-chain disruption and labor supply shortage would only worsen. A stagflation scenario is building.