This Is A New World Where The Most Powerful Players Are No Longer The Bankers, But Politicians, Their Deficits And Debts

By Eric Peters, CIO of One River Asset Management

"Today, unemployment is up to 4.2 percent, inflation's down to a few tenths above 2. So, we know that it is time to recalibrate our policy to something that is more appropriate given the progress on inflation, and on employment, moving to a more sustainable level, so the balance of risks are now even,” answered Chairman Powell. He had just cut interest rates by 50bps.

“The labor market is actually in solid condition. And our intention with our policy is to keep it there. You can say that about the whole economy. The US economy is in good shape. It’s growing at a solid pace, inflation is coming down, the labor market is in strong pace, we want to keep it there. That’s what we’re doing,” explained Jerome, the financial reporters gently tossing him the usual softballs.

Naturally no one asked him how he felt about initiating an easing cycle with the stock market at all-time highs (see "Powell Vows To Cut Rates With Stocks, Home Prices, Rents And Food At All Time Highs").

“We’re trying to achieve a situation where we restore price stability without the kind of painful increase in unemployment that has come sometimes with disinflation. That’s what we’re trying to do. And I think you can take today’s action as a sign of our strong commitment to achieve that goal,” explained Powell.

No one asked whether he took into consideration forward-looking inflation indicators like gold, which has soared to a new record. And Bitcoin is up 137% over the past year.

“And this is the beginning of that process I mentioned, the direction of which is toward a sense of neutral, and we’ll move as fast or as slow as we think is appropriate in real-time.”

No one asked him about AI, infrastructure buildout, the coming electricity shortage, the intensifying trade war with China, how the Inflation Reduction Act is impacting policy, or whether he thinks monetary policy is all that important, now that politicians of both parties seem comfortable running deficits that throughout history were only seen during times of war.

Venturing

“Intuitively most, many, many people anyway, would say we’re probably not going back to that era where there were trillions of dollars of sovereign bonds trading at negative rates, long-term bonds trading at negative rates,” said Chairman Powell, answering a question at the press conference. I was reading the transcript somewhere over the Pacific, at 41,000 feet. “And it looked like the neutral rate was, might even be negative, so and it was, people were issuing debt at negative rates,” said Powell, trying to explain something that probably defies definition.

“It seems that’s so far away now, my own sense is that we’re not going back to that,” continued the Fed Chairman. “But honestly, we’re going to find out. But it feels, feels to me, and that the neutral rate is probably significantly higher than it was back then,” he said, wrestling with his emotions, uncharacteristically touchy-feely for the Chairman. But that’s just the sort of thing that happens when highly intelligent people venture into the unknown. They feel their way. “How high is it? I don’t think we know. It’s again, we only know by how it works.”  

Since I couldn’t ask Powell a question, and since the reporters seemed uninterested in pursuing the only line of questioning that seemed interesting, I fed those quotes into ChatGPT4o and asked if the person speaking sounded like he knew what he was talking about?

“The person in this statement does not sound particularly confident or certain. Here's why: Hesitation and Repetition: The use of phrases like "most, many many people anyway" and "so and it was, people were issuing debt" suggests uncertainty or a lack of clarity in their thought process. Indecisive Phrasing: The speaker uses terms like "might even be," "probably," "my own sense," and "I don’t think we know," all of which indicate a lack of firm conviction or precise knowledge. Contradiction: The speaker says, "we're going to find out" and "we only know by how it works," which implies they don't have a clear answer and are relying on future outcomes to provide clarity.

I like really smart people who admit they don’t know things, especially when most people expect them to. Those kinds of people are in short supply. So, we’re lucky to have Powell in his seat. But the Fed completely underestimated inflation, got hopelessly behind the curve, then hiked rates in an unprecedented fashion. They thought the natural rate of interest for the world’s largest economy was probably negative, and in a few short years changed their minds and think it’s probably positive. The only bear market left is in the value of an economics PhD.

From 41,000 feet the world looks as it has for thousands of years, and certainly as it did under Greenspan, Bernanke, Yellen. Back then, people believed central bankers knew what they were doing, and they were the most powerful players in markets.

But now, we are coming to terms with a new world, where Powell and his people are feeling their way forward, in an economic environment that barely resembles recent decades. And where the most powerful players are no longer the bankers, but the politicians, their deficits, debts. This is going to be fun.