Data, Not Drama: Fed Chair Powell’s Firm Stance Post-Election

Stocks churned throughout yesterday's action-packed session, closing mixed. Traders took some "hard-earned" profits from the prior session's better-than-expected climb, and tech shares filled the vacuum taking tech-heavy indexes higher.

Just say "no." Chairman Powell channeled Nancy Reagan yesterday and dropped a big "no" on a reporter when asked if he would resign with Trump's winning the election. He could have said, "we'll see," the famous parent-invented way of saying - "no" to their kids without saying "no." He could have evoked the millennial favorite "absolutely not," which is also a firm "no." Jerome Powell did what he does best, directly to the point, he gave a stone-cold look and simply said "NO."

I often lampoon the Fed because its members are such easy targets, often weaving elaborate scenarios, complex models, and even inserting a bit of theater into their public speaking engagements. They are mostly economists, bankers, and academics who have learned to behave themselves at beltway cocktail parties. They rub elbows with politicians, but ultimately, they are not politicians. They place intellectual integrity above their political beliefs. In truth, Federal Reserve Governors start their lives as political appointees. That is, they are floated by the White House and approved by the Senate. However, once confirmed, the bankers are "in the wild", so to speak. To be clear, once they get the keys to their grayish offices at The Bank, they cannot simply push buttons and make "stuff" happen, no. They vote on policy.

As it happens, the current Board of Governors is led by a Republican (Powell) and the remaining Governors' affiliation is split 2 to 4, Republican to Democrat. The Governors don't make policy alone. They are part of a larger Federal Open Market Committee which includes an ever-present New York Fed President and another four alternating members which are drawn from Presidents of the remaining Federal Reserve Banks. The New York Fed President, John Williams, is non-partisan. Go on, you can search with Google, and you won't come up with much. Remaining Fed Heads span the spectrum and are appointed by their local Fed Bank boards. The point that I am painstakingly attempting to get at is that the Fed does what the Fed sees fit.

That does not make the big bankers impervious to making errors. Actually, in all fairness, it is easy to judge them in hindsight. In fact, like most of us, they are rarely lauded when things are going well, but quick to be criticized when the kitchen gets hot. Let me take a quick poll. Would you rather have high interest rates or low interest rates (fine print: bankers cannot participate)? Of course, everyone loves low interest rates. Therefore, if we left interest rate policy up to Congress and the President, one would expect interest rates to be perpetually 0% as the politicians would hope to curry favor from voters. Politicians do not set interest rate, or monetary policy, no, their job is to affect the economy through fiscal policy. Of course, that does not mean that ambitious politicians don't try to influence interest rate policy through jawboning, the insider word for publicly cajoling.

Now, I am not saying that FOMC members are invulnerable to feeling the political pressure, but I am pretty confident that their decisions are ultimately - wait for it - wait for it - data dependent. FOMC members vote on policy based on data, which is kind of reassuring, isn't it? Some members are more sensitive than others and each member has his or her favorite bits of data to watch, and that is how we end up with hawks and doves. At the moment, the FOMC counts 7 known hawks, 6 known doves, and another 7 without spirit animals. I would say that makes up a pretty well distributed group.

So, it should be clear to you by now that if you want to know what the Fed may do next, we should filter out what the politicians are saying, ignore the Fed policymakers' political affiliations, and determine who amongst them are the hawks or doves. Taking it a step further, a Fed Chairman cannot be fired by a politician, and this current Fed Chief, Jerome Powell is not backing down, according to his latest pronouncement, "no."

Good on you, Jerome. Also, the Fed pledged to be data dependent going forward, though they are perpetually data dependent, but we appreciate the reassurance. In yesterday's press conference, the Chair was pressed on the Fed's policy path given the election results, and he did his best to do what he is supposed to do: remind us that The Bank will do what it deems best for the US Economy based on, simply, numbers, not promises, hopes, or even forecasts. On forecasts, we will get a fresh one from the Fed at its next meeting in December, but don't get too excited. Yes, you will get to see where the gaggle of hawks, doves, and undeclareds think rates and the economy will be in the future. But it is important to remember that these economists, like most economists, are notoriously bad at forecasting; Powell has admitted it himself. So, the Fed will continue to watch the data and make "appropriate" policy decisions in response. Yesterday's announcement fell far short of fireworks, but that is not what the market needs right now. What it needs now is to, simply watch the data.

YESTERDAY'S MARKETS

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• University of Michigan Sentiment (November) may have inched higher to 71.0 from 70.5.
• Next week: still more earnings (don't miss 'em) along with Consumer Price Index / CPI, Producer Price Index / PPI, Retail Sales, and Industrial Production. Check back in on Monday to download calendars and avoid missing that important - DATA. ☝️

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