The Pause that Refreshes – a Midterm Surprise?

We’ve had enough of Quantitative Tightening! It’s time for a pause.” – The Lonely Realist

TLR last year ventured that Joe Biden and Jay Powell had engaged in political deal talk when they discussed Jay’s reappointment as Fed Chair. In exchange for that reappointment, one of the promises Jay made was that he would successfully manage America’s economy. Unfortunately, Jay hasn’t delivered on that promise. Jay’s “transitory” approach to inflation last year was way off the mark. Inflation now is Americans’ top concern, so much so that it’s weighing heavily on the Democratic Party’s midterm election prospects. But that’s unlikely to have been Jay’s only promise. The midterm elections are around the corner …, and the Fed’s next interest rate announcement will come the week before. The timing presents an opportunity.

The markets are beyond skeptical that the Fed on November 2nd will do anything other than raise interest rates by at least 75 basis points (bps). The CME Federal Watch Tool calls it a virtual certainty! Economists also are predicting an additional rate-hike at the Fed’s December 14th meeting to further reflect recent unpleasant inflation numbers and Fed Governor tough talk.


The fact is that the Fed already has been tightening the economic screws in ways reminiscent of Paul Volker in the early 1980s – the Fed’s 2022 rate-hike cycle has been the fastest and steepest in American history. It nevertheless will take many months for the Fed’s Quantitative Tightening (QT) to impact prices, wages and inflationary expectations. There is no doubt that the Fed wants the markets to feel interest-rate pain, but not at the cost of causing them to seize up. Its goal is to chill inflation, not cause a significant economic downturn. Nevertheless, the model maintained by Bloomberg Economics is predicting a recession with 100% certainty. If so, the Fed and Jay Powell would have failed to both tame inflation and avoid an avoidable economic downturn. Nothing, however, is etched in stone. The combination of the Fed’s QT, a soaring US Dollar, the Ukraine War, energy shortages, China’s COVID lockdown, etc., etc., etc. now are having the cumulative effect of slowing the global economy. It’s a gradual deceleration process that has ripple effects that increase the economic and geopolitical risk of accidents, especially should the Fed continue to stomp on the QT brake pedal (much as Cassandra warned earlier this month). That should be reason enough for the Fed to pause and consider whether another major interest-rate hike in early November is appropriate …, more so when combined with Jay’s promise to Joe and the political pressure undoubtedly placed on Jay by the Biden Administration upcoming midterms. Moreover, the negative impact of America’s QT on other countries has been significant, with a crashing Japanese Yen, Great Britain’s political and government bond (Gilt) calamities and Italy’s increasingly precarious financial position. These frame the potential for cascading illiquidity and corporate insolvencies. With inflation arguably having peaked and economists predicting recession, is a 75 bps rate hike prudent? While a majority of economists counsel continued tightening, stock and bond market investors want the Fed to stop stone cold … as does President Biden. How might Jay satisfy these disparate constituencies?

A pause in QT that is not perceived as a pivot beckons. Doing so would require Jay to walk a fine line, managing interest-rate expectations without suggesting that the Fed is tapering QT. Such a pause could be accomplished if, for example, the Fed were to announce a 50 bps interest rate hike on November 2nd – instead of the 75 bps increase expected by the markets and America’s voting public – as long as it were to be accompanied by both a “deliberative” focus on the fragility of the global economy and a statement by the Fed that it is closely monitoring the data, sees signs of moderating inflation and intends to further hike rates in December (and thereafter) should it not see evidence of waning inflation. Such a message would follow from a September 30th statement by Fed Vice-Chair Lael Brainard that the Fed is carefully monitoring the international impact of its actions and intends to proceed cautiously with QT – noting that there has been a worrisome international impact via the Gilt, Yen, Pound and energy fiascos. The Fed also could point to a variety of domestic economic signals suggesting that inflationary pressures are easing in response to its tightening actions. For example, even though wages are still rising, the rate of increase is decelerating with year-on-year wage inflation dropping for the first time in over a year so that it now is slightly below core CPI inflation. In addition, consumer spending declined in September and purchasing power slipped for the second consecutive month. Housing price growth also is slowing. Rising mortgage rates are discouraging homebuying, a trend that takes time before it is reflected in CPI statistics. As a consequence, Jay could explain that the Fed simply is taking a deep breath and will be looking to forthcoming data before increasing its already robust QT campaign.

If so, the Fed’s November action would be perceived as other than political … even if it is. Whether or not such a pause would impact the midterms is unknowable. For Jay, however, it could be the repayment of a political debt incurred more than year ago. And for stock and bond market enthusiasts, it would present an unexpected buying opportunity.

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Finally (from a good friend)

  1. Reading can seriously damage your ignorance.
  2. The ability to speak several languages is an asset, but the ability to keep your mouth shut in any language is priceless.
  3. Be decisive. The road is paved with flat squirrels who couldn’t make a decision.
  4. Getting another set of teeth would be much more useful at 60 than at age 6.
  5. Drinking 42 cups of coffee at one sitting will kill you with a caffeine overdose, please stop at 41.
  6. “The starting pay is $40,000. Later it can go up to $80,000.” “Great, I’ll start later.”
  7. Trust science. Studies show that if your parents didn’t have children, there’s a high probability you won’t either.
  8. Only in math problems can you buy 60 cantaloupes and no one asks what the hell is wrong with you?
  9. When the pool re-opens, due to social distancing rules, there will be no water in lanes 1, 3, and 5.
  10. Tip: Save business cards of people you don’t like. If you ever hit a parked car accidentally, just
    write, “Sorry” on the back and leave it on the windshield.
  11. When I get a headache, I take two aspirin and keep away from children just like the bottle says.
  12. Just once, I want the username and password prompt to say, “Close enough.”
  13. If you see me talking to myself just move along. I’m self-employed, and we’re having a meeting.
  14. “Your call is very important to us. Please enjoy this 40-minute flute solo.”
  15. I hate it when I can’t figure out how to operate the iPad and my tech support guy is asleep. She’s 5 and it’s past her bedtime.
  16. Tip for a successful marriage: Don’t ask your wife when dinner will be ready while she’s mowing the lawn.
  17. So, you drive across town to a gym to walk on a treadmill?
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