Jerome Powell: Same Old Song and Dance

The Federal Reserve wrapped up its April meeting yesterday. Again, there were no changes in actual policy, leaving everybody to try to parse out meaning from the FOMC’s statement and Jerome Powell’s post-meeting press conference.

When you boil it all down, it was pretty much the same song and dance from  Federal Reserve Chairman Jerome Powell.

In a tweet, Peter Schiff said these FOMC statements have been stripped of any real news value.

Everyone knows what the Fed is going to say, as it’s clear the Fed isn’t willing to risk a negative surprise. So like the Oscars and the NBA Finals, the ratings have plummeted.”

With nothing substantive in the official FOMC statement, everybody is left trying to read meaning between the lines of Powell’s post-meeting presser. As Peter put it in a recent podcast, the Fed has basically just a big PR firm. A large part of the Fed’s job today is public relations and spin.

To try to create a false sense of confidence in the US economy and the US dollar.”

Check. And check.

On Wednesday, Powell continued on message: the economy is recovering and rising prices are “transitory.” He bluntly insisted the central bank is still a long way from even considering tapering its $120 billion per month in bond purchases or raising interest rates. “It is not time to start talking about tapering,” he said.

Powell reiterated that inflation will have to moderately exceed its 2% target “for some time” before tightening monetary policy. He also said the economy is “a long way from our goals” and it’s going to take a while to reach them.

We expect to maintain an accommodative stance to monetary policy until these employment and inflation outcomes are achieved. With regard to interest rates, we continue to expect it will be appropriate to maintain the current zero to 0.25 percent target range for the federal funds rate until labor market conditions have reached levels consistent with the committee’s assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”

Wells Fargo bond strategist Michael Schumacher told CNBC Powell is “slamming the door shut” on tapering any time soon and predicted Powell’s jawboning will keep a lid on rising bond yields – temporarily.

It means that yields are a little less likely to go rocketing up. You’re not going to get that wild card event where the Fed does talk about tapering fairly soon.”

Peter summed it up this way in a tweet.

Powell just told America that no matter how much the CPI rises this year, it will not cause the Fed to move interest rates above zero, as any 2021 #inflation will be dismissed as transitory. Only if the CPI continue to soar in 2022 will the Fed raise rates. Good luck with that!

— Peter Schiff (@PeterSchiff) April 28, 2021

Even as Powell and Company insist inflation is “transitory,” they continue to assure everybody that if rising prices do get out of control, the Fed is “prepared to adjust the stance of monetary policy as appropriate if risks emerge.”

Historically, the Fed has dealt with inflation by tightening monetary policy and raising interest rates. That’s what everybody expects. It’s a big part of the reason gold has languished in recent months. Everybody is anticipating a pivot to tighter monetary policy. But how does the central bank do this in an economy built on debt? Peter Schiff has been saying for months that the Fed won’t fight inflation because it can’t.

Peter is right. The Fed still has trillions of dollars in government debt to monetize. There is more spending coming down the pike. Fed bond buying is propping up the bond market. If the central bank pulls out that prop, the entire house of cards comes crashing down. Powell has to keep up this song and dance to keep the markets calm. Once they realize inflation isn’t transitory and the Fed is impotent to do anything about it, all hell will break loose.

One has to wonder how long Fed-talk will keep the markets sated. Schumacher said even a couple of months of big inflation prints could make markets jittery. “There will be more pressure on the Fed to explain this inflation framework,” he said.

Peter thinks once the Fed realizes inflation is transitory, it will be too late.

According to Powell if the CPI rises by 10% in 2021 the Fed will have left interest rates at zero the entire year. Then if the CPI goes up another 15% in 2022 the Fed will finally concede that the increase in inflation isn’t transitory. The first rate hike will be from 0 to 20%.”

Powell hinted that he knows the stock market is a big bubble. He admitted that some aspects of the market are “a bit frothy.” He even conceded that monetary policy is a contributing factor. But he stopped short of taking the full blame.

I won’t say it has nothing to do with monetary policy, but also it has a tremendous amount to do with vaccination, and reopening of the economy, that’s really what has been moving markets a lot in the last few months.”

It’s a shame nobody asked him why stocks were soaring at the height of the pandemic, long before the economy started reopening.

And a “bit frothy” is a bit of an understatement. The S&P 500 is valued at about 30 times above reported earnings, exceeding the highs during the dot-com bubble.

After trading lower early in the day, gold rallied on the Fed’s messaging, closing up on the day. The yellow metal was trading in the $1,765 range midday and rallied to over $1,788 Wednesday night.