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Is it too early to start making excuses for Jerome Powell?

Is it too early to start making excuses for Jerome Powell?

Dollar’s rise shows that markets have already decided what the central bank will do in 2022

When I was little, my father took me in a boat far from the coast and threw me overboard. I swam to the land and reported my father to the police. That was how I learned to write. Markets sometimes need to be exposed to extreme conditions for the shock investors experience to teach them something. At least calmness. If in 2013 Ben Bernanke caused hysteria with a message about the collapse of QE, then in 2021 Jerome Powell, hinting on a reduction in asset purchases in November, provoked only a slight sickness in the financial markets. Yes, Treasury yields are growing. Yes, stocks are falling. But the scale of the correction cannot be compared with the events of 8 years ago!

– I always try to behave in such a way that no one understands me.

– Why?

– If they understand, they will kill me right away.

Jerome Powell’s speech to Congress was confusing. Before him, several FOMC officials said they were confident in the temporary nature of high inflation, while the Fed chairman began to talk about the imperfection of the models used by the central bank; that he cannot control the process of supply disruptions; finally, that in 2022 inflation may remain at high levels. It will be extremely difficult for the Fed to deal with high PCE and underemployment at the same time. What does that mean? Does Powell prepare the ground, suggesting that he could fall? By fall I mean starting raising rates and driving the economy into a new recession. But he doesn’t even know if he will stay at the helm of the Fed.

If the horses have done everything so that they cannot be changed, then the crossing will never end. The chair under the Republican, who was appointed to the office by former US President Donald Trump, has started shaking seriously. Some Democrats believe that Powell, who has repeatedly voted in favour of Wall Street deregulation, is a dangerous man who may lead the economy to another recession. And Joe Biden desperately needs the votes of these Democrats to get the new fiscal stimulus package through Congress. How will the president solve this problem?

Markets got used to Powell, he calmed them down and in March 2020 performed a real feat by dropping the federal funds rate to zero and launching a colossal QE. The Fed chairman has become the messiah but his opponents argue that the central bank’s success in saving the economy was an accident. Nevertheless, the US fell into a huge pit, and one of those who pulled the country out was Jerome Powell. This must be remembered.

I would like to believe that the Fed chairman will remain for a second term. He has a difficult job to do. How to reduce inflation and make sure that the economy does not lose steam? Sometimes, after all, you start to slow down so hard that you stop entirely. Judging by the reaction of the financial markets, the Fed has already made its choice. The rise in Treasury yields and the strengthening of the US dollar signal an aggressive monetary restriction in 2022. Let them not repeat the mistakes of their predecessors!


Price chart of EURUSD in real time mode

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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