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Fed Chief Straps On The Knee Pads

July 11, 2019

Fed Chief Powell supposedly has strong support inside Congress to fend off Trump’s calls for lower interest rates. How do we know this? Well, there was this headline atop the lead story in Wednesday’s Wall Street Journal: ‘Powell’s Support Inside Congress Is Deep’. And here was the sub-hed, in case you missed the point: ‘Lawmakers on both sides say they would oppose any bid to oust the Fed chairman’. Perhaps it was just bad timing, but the financial world’s newspaper of record has rarely looked more stupid. Oust Powell??  Give us a break!  Less than a year into the job, the guy is looking like a potential hero in the promiscuous borrower/lender Hall of Fame, a worthy successor to ‘Easy Al’ Greenspan.  For at the moment readers were savoring the WSJ story with their morning coffee, Powell was on Capitol Hill, telling Trump and the loose-credit rabble exactly what they wanted to hear — i.e., that money can be made to grow on trees, and that he will be more than happy to make this happen later in the month, when the FOMC next meets. On this news, U.S. stocks and gold shot higher, yields fell, and on Wall Street, at least, all seemed right with the world.

If there is any surprise in this, it is Powell’s obligingly donning the Fed chairman’s traditional knee pads without making any of the usual face-saving obfuscations. You’d think he would at least feign token resistance, since he knows how badly he is being played by Trump and Wall Street. For make no mistake, by putting the U.S. on a likely course toward negative interest rates, he has one-upped even his philosophical mentor, Easy Al. Sucking up to monetary doves and giving them a whiff of monetary cocaine with the broad stock averages near record highs and unemployment at a 50-year-low is an all-in bet that Powell cannot possibly win, since recessions do happen (and the next one promises to be a real doozey).

Confirming Our Worst Fears

By capitulating when U.S. prosperity is at flood tide, the Fed chief looks like a wimp and a patsy. He will be judged even more harshly by posterity if he is still in the driver’s seat when America’s long expansion ends. Powell could say things now that might help him save face later:  "The economy is strong and looks like it will need no help, but we will certainly keep our options open." But instead of employing cryptically nuanced double-speak like all Fed chairmen before him, he has embraced the arguments of Trump and the rabble by expressing concern that the trade war and "global uncertainties" will eventually end the good times. Of course they will, regardless of whether credit stimulus keeps the music playing for a little longer. But if "managing expectations" is Powell’s job, hitting the monetary panic button as he is about to do could backfi by confirming our worst fears about the imminence of a day of reckoning.


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