In all the commentary around what the Fed will or won’t do, no-one wants to mention that elephant over there in the corner.
Does Fed Chair Powell want another 4 years of Donald Trump? Or is he on Team “we’ll stomach another 4 years of Biden?” Either on principle (risk of an authoritarian takeover) or on self- interest “we have to break the Trump fever if we’re ever going to take “our” Republican Party back from the wackos…?”
If you think…
- …Powell wants Trump = no rate cuts. That risks a recession. Underlying inflation has already trended down to 2.6% by this solid NYFed data series. Keeping rates at 5% gets more restrictive as inflation recedes.
- …Powell sees Biden as the lesser of two evils = rate cuts as soon as he can plausibly can.
If Powell wants to cut, he HAS to do it relatively early in 2024. A rate cut close to the election would look like an obvious intervention.
My guess is Powell is an institutionalist first and a partisan second. No fan of Biden, but more afraid of another 4 years of chaos and norm-breaking. If that’s the case, the Fed will be looking for an excuse to cut rates early in 2024. Comments by the normally hawkish Waller hint at what that excuse might be –
If inflation continues to cool “for several more months — I don’t know how long that might be — three months, four months, five months — that we feel confident that inflation is really down and on its way, you could then start lowering the policy rate just because inflation is lower,” Waller said in remarks at the American Enterprise Institute, a Washington, D.C.-based think tank. “It has nothing to do with trying to save the economy or recession.”
Lots of other factors involved. But worth thinking through.
I’ve been buried in thinking about AI etc.., but coming up for air a bit. Have a Ukraine piece to get out too.