A nothing 🍔

What a massive few weeks it’s been—with greedy billionaires out of control, CEO’s getting fired left, right and centre, the Middle East war escalating, the U.S. presidential elections, and the UK and the U.S. cutting interest rates again.

Speaking of which, the November FOMC meeting was a nothing burger. The Fed’s open market committee unanimously delivered its expected 25 bps adjustment cut to the Federal Funds Rate (FFR)—as the Powell Fed desperately seeks to engineer its goldilocks soft/no landing.

A boring end to a massive few weeks.

Starting to think about the balance sheet

At the ‘afters’ Presser, Fed Chair Powell indirectly guided on the Fed’s balance sheet run-off (or QT)—a key mechanism for removing liquidity from the financial system—as he illustrated his answer to a question from Associated Press, saying: “so, we reach a point where we slow the pace, much like an airplane reaching the airport it slows down, and so, you know, it, uh, we’re thinking about it, but it’s something that we’re just starting to think about.”

Hmmm, that’s signalling the balance sheet run-off might slow or terminate in the months ahead.

Perhaps Trump’s win a day earlier spurred this thinking? You will recall the Fed’s balance sheet peaked at a hair under $9 trillion and so far, the run-off has resulted in a $2 trillion run-off to ~$7 trillion–meaning it’s still ~8 times higher than it was before the GFC ($0.9 trillion).

If QT slows, pauses and/or is terminated, this will leave more liquidity in markets, further pushing up asset prices as interest rate cuts and premature pivot guidance have done.

But on what basis is this responsible central banking? Well, in light of Trump 2.0, it’s not. Even without Trump being returned to the White House, there was no evidence in the unemployment rate to justify that 25 bps cut. The economy is doing just fine, Treasury auctions are going off well, and there was no reason for that extra cut.

Policy is far too accommodative in light of Trump 2.0

The fact is that monetary policy is not restrictive. Add to that more fiscal priming with Trump 2.0 tax cuts and ‘Made in America’ super-sized tax cuts (meaning higher after-tax corporate profits and more disposable income for households)—and you get more monetary + fiscal stimulus working together to create more/cheaper money (and bank reserves) that can be channelled into buybacks and risky investment alternatives.

But at the same time, we will see higher inflation if Trump 2.0 tariffs are brought in.

Trump 2.0 has without doubt thrown Fed policy a curve ball

Chair Powell said a few other things, emphatically.

The Fed’s plan to fight stagflation, should it happen, is to not let it happen (the Fed is scared about creating stagflation).
They are to targeting 0% inflation (the Fed is scared about creating deflation).
He did not rule out an interest rate hike next year (the Fed wants to preserve maximum optionality).
He has no definitive view on where the neutral rate is (the Fed’s ultimate destination for the FFR is unknown).

Supplemental key point, when cheekily asked by a Politico reporter on whether he should resign if Trump asks him to, the Chair’s response was ‘No’.

And on whether legally, he would be required to leave if he was asked to leave by Trump, his answer was ‘Not permitted under the law’.

Well, I feel better now, and I think that might have been the first yes/no response, and the first 5-word public response Chair Powell has provided at an afters.

The battle lines have already been drawn by a defiant Fed Chair

So, the battle lines are being drawn, with Fed Chair Powell (who was the Presidential nominee for Chair during Trump 1.0) resolved to stay put, and move rates down or up depending on what Trump 2.0 brings, despite not wanting to remain independent (and in his job).

We’re in for some funky behaviour at the Fed as two of the most powerful individuals in the U.S. surrender to their ego and duke it out.

Key takeaway

As usual, we’ll have to wait and see the extent to which the tariff-led, protectionist, fiscally dominant, mercantile, anti-green energy policies of Trump 2.0 rolls out next year. But your business strategy and personal investment portfolio should be calibrated to recognise higher inflation for longer next year, as well as upwards pressure on certain commodity and risk asset prices, as a result of Trump 2.0.

See you in the market—but be sure to strap in as we ride markets higher while the social fabric of America crumbles.

Mike

November 7 FOMC ‘afters’ opens door to hawk thinking on the QT