The Grateful Fed

By Stefan Koopman, Senior Macro Strategist at Rabobank

Earlier this month, Fed Chair Powell was spotted at a Dead and Company show in Virginia. The fact that someone as powerful as Fed Chair Jerome Powell is sometimes just “Jay Powell – fan of guitar music”, created a buzz on social media. Yesterday, while testifying before congressional lawmakers, the elephant in the room was finally addressed. Answering Representative Nickel’s question on whether he liked the show, he answered that he has been a ‘deadhead’ for 50 years.

The setlist in Virginia included Jerry Garcia’s “Deal”, a tune that eventually became a staple in the Grateful Dead’s, and eventually Dead and Company’s, repertoire. If he listened carefully, Jay Powell may have taken his cue from the song’s opening verse:

Since it costs a lot to win and even more to lose
You and me bound to spend some time wonderin' what to choose
Goes to show, you don't ever know
Watch each card you play and play it slow

That pretty much sums up the Fed’s predicament. It could cost a lot to win and get inflation back down to 2%. The risk of recession and rising unemployment is real. But the political and social costs of inflation entrenchment well in excess of 2%, which arbitrarily leads to winners (with pricing power) and losers (without pricing power), are potentially even higher. This late in the hiking cycle, neither markets nor policymakers know the ‘right’ course of action. The future is inherently uncertain, yet we all spend hours and hours wondering what’s the best strategy going forward. So, as deadheads know, it may be best to just play your cards slowly, and figure out the best way forward as you go along.

As our FOMC-watcher Philip Marey notes in his commentary, Chair Powell’s visit to the House Committee on Financial Services took place only a week after the FOMC meeting, and there hadn’t been any major data releases or market events in between. It was therefore never likely to be a major market moving event – and it didn’t turn into one either. His message on monetary policy remained vague, as he is playing his cards slow. On the one hand, he said that more rate hikes are needed to get inflation under control, but on the other hand, there was time for a break. That ambiguity helped Powell navigate the Committee, as he had something for both sides of the aisle: a pause for the Democrats and the projection of additional hikes for the Republicans.

Getting inflation back down to 2% has “a long way to go” and, as such, the longest day of the year wasn’t one for the bulls. Both the S&P 500 and the Stoxx Europe 600 fell by 0.5%, even as the VIX continued its decline to near 13. Sentiment looks to remain subdued in today’s trading as well, with new, steeper declines at the opening. The 2-year Treasury yield ticked slightly higher at 4.73%, exactly 100bp above the 10-year’s yield.

The euro rose to as high as 1.0997, its highest level since May 11, following comments from the ECB’s Schnabel and Nagel. Both emphasized the risk of stubborn eurozone inflation, with Nagel comparing inflation to a “stubborn greedy beast” and Schnabel emphasizing the risk of a wage-price spiral due to an “incredibly strong” labor market. This contrasted sharply with the Fed’s Goolsbee’s comments, who said that last week’s decision was a close call for him.