Ever since the Fed realized it had made a horrible mistake by repeating – erroneously – for almost a year that inflation is transitory, and is now hell bent on crushing the same inflation it spawned by injecting trillions into the system, and which it somehow hopes to do by sparking a recession and a bear market, one Fed speaker after another has tried to convince markets that after 12 years of pushing up the biggest stock bubble in history, the Fed suddenly no longer cares if stocks crash as long as that somehow unclogs broken supply chains and eases inflation (spoiler alert: it won’t).
Today’s comments from Kansas City Fed president Esther George were no different: speaking on CNBC, one of the Fed’s original hawks (not the fake, “reformed” types like Kashkari and Williams) said the “rough week in the equity markets” was not surprising, and reflected the central bank’s policy tightening, but the turmoil doesn’t alter her support for half-point interest-rate hikes to cool inflation.
“Looking at the stock market is an important price signal – as many others are – to watch and see. This is a time of uncertainty. It’s been a rough week in the equity markets” she said, adding that “what we are looking for is the transmission of our policy through markets understanding, and that tightening should be expected,” George told CNBC. “It is one of the avenues through which tighter financial conditions will emerge.”
This was just the latest confirmation that the Fed views a slumping market as one of the direct pathways to achieving some disinflationary outcome, and as such, anyone hoping for a quick bounce in stocks here is literally “fighting the Fed”, at least until such time as the Fed realizes it has sparked a deep recession and scramble to reverse its tightening policies, just like it did in late 2018.
“What we’re looking for is the transmission of our policy through markets understanding and that tightening should be expected. It is not aimed at the equity markets in particular but I think it is one of the avenues through which tighter financial conditions will emerge”
George then added that “right now, inflation is too high and we will need to make a series of rate adjustments to bring that down,” she said. “We do see financial conditions beginning to tighten so I think that’s something we’ll have to watch carefully. It’s hard to know how much will be needed.”
As noted above, George’s dissents on policy in the past have placed her on the hawkish wing of the FOMC, though recently she’s been more of a centrist. A policy voter in 2022, she pushed back on the need to raise rates by bigger increments than have already been signaled.
“I am very comfortable right now doing 50 basis points,” George said, adding that plans to shrink the Fed’s $8.9 trillion balance sheet will contribute to a tighter policy. “Moving deliberately, making sure we stay on course to get some of those rate increases into the economy and then watch how that is unfolding is going to be really the focus of my attention.”
‘’I think we are good at 50 basis points,” she added. “I would have to see something very different to say we need to go further than that… For me, what’s more important is at what point will we see inflation level out and then begin to decelerate,” she said. “That I think will tell us something about where we need to go with monetary policy.”
To be sure, nothing earthshattering above, and largely in line with what consensus now views as a Fed Call rather than a Put.
And yet, in his morning comment on George’s remarks, Nomura’s Charlie McElligott notes that while George is not overly concerned about market behavior and consumer outlook relative to the “now” focus on the need to move inflation lower, her comments confirm that they are “watching” FCI impact here:
George says “that tightening should be expected” when asked about whether the Fed wants stock markets to be weaker. She says they will know when “enough is enough” when inflation moves lower, noting that inflation remains too high and needs to move lower.
George also says “trade offs are starting to emerge” for consumer spending because of high food and fuel costs, which should feed through the data. But she does not suggest this is a reason to back off the Fed’s tightening plans.
“It’s hard to know how much will be needed” in terms of tightening financial conditions but she described the recent activity as the “beginning” of tightening financial conditions.
This, as McElligott notes, is a pile-on to yesterday, “where the realization that the Fed (Powell and “dove” Evans!) were telling-us that they are planning on getting to ‘neutral’ before Year-end…and likely then immediately rolling into ‘restrictive’ territory via incremental 25bps hikes from there until inflation is “killed dead” down to target — recession be damned — truly “cracked” risk-assets.”
When this “realization” happened to overlap with a sentiment wipeout from “Consumer” bellwethers WMT and TGT with regard to the status-check of the “bulletproof” American Consumer (and particularly, the low-end) which, instead, is now showing signs of deterioration at least in-part due to the Fed’s inaction of Inflation…it was simply too much to bear.
As the Nomura strategist concludes, this is not simply the “stretched consumer” story on account of food and energy inflation in-and-of-itself. This is also the comeuppance of the “COVID bullwhip” effect which so many had anticipated, as all that “pent-up demand release,” over-ordering, double-booking and paying through the nose for transports into the empty shelves hysteria after the Vaccine economic “unclenching,” against Consumers who were flush with savings and stimulus….into now, what has become the “out” -trade, the “come to jesus moment” thereafter, as the aforementioned and suddenly weakened Consumer (especially with the Stimmies “out” of the system); who is having to be more discriminate with the spending—is “real time” down-shifting.
In short, the Fed may not care about markets right now, but consumers do, and once employment, housing and prices all crack, the Fed will scramble to put the tightening genie back in the bottle. If 2019 is any indication, we will go from rate cuts, to “not QE”, to QE in roughly one year.