Tim Duy’s Fed Watch, 11/18/21

Published on November 18, 2021
SGH Insight
Finally, West Virginia Senator Joe Manchin reported on his meeting with Federal Reserve Chair Jerome Powell. Via The Hill:
Sen. Joe Manchin (D-W.Va.) told The Hill that he was “looking very favorably,” but hadn’t made a final decision, on supporting Federal Reserve Chair Jerome Powell if he’s renominated as chairman, after the two spoke on Wednesday.
“Well we’re looking very favorably towards that, because I needed that conversation with him. But I have not made up my mind yet. But I’m just saying that it helped an awful lot having him clear up a lot of the concerns I had,” Manchin told The Hill.
This is a political decision and part of that decision will be the difficulty of getting the nominee confirmed. If Republicans were to be largely united in opposition to one nominee, Manchin would be a critical vote, and his leaning toward Powell could help seal the deal (Democrat Jon Tester also leans towards Powell, Warren of course favors Federal Reserve Governor Lael Brainard).
Market Validation
Policy Validation

11/22/21

President Joe Biden selected Jerome Powell for a second four-year term as Federal Reserve chair while elevating Governor Lael Brainard to vice chair, keeping consistency at the U.S. central bank as the nation grapples with the fastest inflation in decades and the lingering effects of Covid-19.
The move, announced by the White House on Monday, rewards Powell for helping rescue the U.S. economy from the pandemic and tasks him with protecting that recovery from a surge in consumer prices. A Republican, Powell faces what will likely be a smooth confirmation in the Senate, where he was backed for his first term as chair in an 84-13 vote and whose members he subsequently worked hard to woo.

Williams, Evans, Fed Chair

A couple of things of note today. First, Chicago Federal Reserve President Charles Evans said rate hikes:

“could begin next year after we finish our asset-purchasing program, or it could be as long as into 2023.”

This headline also crossed the wires:

FED’S EVANS SAYS HE STILL EXPECTS NO RATE INCREASE UNTIL 2023, BUT HE MAY BE ‘FLAT OUT WRONG’

This compares to a somewhat more qualified view ten days ago:

“If inflation expectations increased a lot,” then “it would make sense to certainly think about 2022” for interest-rate increases, “but I’m thinking — for my own appropriate policy — don’t think it’s until 2023.”

I think this is Evans recognizing which way the dots will be shifting, toward a rate hike in 2022, even if he believes that is not the appropriate policy.

Separately, New York Federal Reserve President John Williams said the economy is “roaring back” although he was quick to note that the pandemic easing was a key factor. More importantly, he acknowledged that inflation is becoming “broader-based” beyond pandemic related price increases. That’s important because it offers up the possibility that inflation is becoming more entrenched than anticipated. That I think speaks to how the Fed is increasingly primed to react to continued high inflation. Likewise, Williams repeated a familiar story regarding inflation expectations:

When it comes to the rise in longer-term expectations, “I think that’s a positive development,” he said, while adding that “you wouldn’t want those longer-run inflation expectations to move…significantly further up.”

That also reminds us that a change in the inflation expectations story could prompt a more rapid reevaluation of the policy stance. Moreover, there is a bridge here to tighten via the argument that persistently high inflation could pull inflation expectations higher.

Finally, West Virginia Senator Joe Manchin reported on his meeting with Federal Reserve Chair Jerome Powell. Via The Hill:

Sen. Joe Manchin (D-W.Va.) told The Hill that he was “looking very favorably,” but hadn’t made a final decision, on supporting Federal Reserve Chair Jerome Powell if he’s renominated as chairman, after the two spoke on Wednesday.

“Well we’re looking very favorably towards that, because I needed that conversation with him. But I have not made up my mind yet. But I’m just saying that it helped an awful lot having him clear up a lot of the concerns I had,” Manchin told The Hill.

This is a political decision and part of that decision will be the difficulty of getting the nominee confirmed. If Republicans were to be largely united in opposition to one nominee, Manchin would be a critical vote, and his leaning toward Powell could help seal the deal (Democrat Jon Tester also leans towards Powell, Warren of course favors Federal Reserve Governor Lael Brainard). But it is a high bar for any senator to outright block either nominee of a president from their own party for a critical position like Fed chair on ideological grounds. Another potentially relevant point here is not just what Manchin learned about monetary policy, of which there isn’t much daylight between Powell and Brainard, but what he learned about the push from the Federal Reserve on climate change issues.

As I have written, both Powell and Brainard are qualified candidates (notice that we don’t see much discussion of that issue or monetary policy; it’s all about differences on regulation and digital currency kinds of topics) and whoever is the nominee will likely have to manage a hawkish pivot over the upcoming months. One interesting thing that strikes me is that they might share a similar weakness in that neither has had to manage an upward shift in the inflation dynamic. That hasn’t been the Fed’s focus for many years now, so arguably no one has such experience. I think that would be a more challenging exercise than the common Fed refrain “we have well tested tools to deal with inflation” suggests the Fed believes.

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