Dour Fed, cheery market

0:05Pushkin. Who would be a central banker? Sure, you get to wield enormous power over the economy and markets, but no one likes you, and idiots in the backseat always think they can do a better job than you can. Still, luckily someone still wants to do it, and Jay Powell, chairman of the US Federal Reserve, had his regular moment in the spotlight this week. The boring bit is that the Fed kept rates unchanged. The interesting bit was what Powell and his colleagues had to say about the state of the US economy. Today on the show, we're asking, What kind of job did he do this month in outlining the risks without spooking the markets?

0:47This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets economist here at FT Towers in a properly beautiful day in London. And I've even seen, in fact, my first set of salmon-coloured men's trousers in the wild. So spring is sprung. Spring comes to London. Spring is sprung, boys and girls. Yeah. I'm joined down the line from New York by mi amigo Rob Armstrong from the Unhedged Newsletter and by his glamorous assistant Aidan Reiter. Roberto. Si. The last time we did this here pod, we were on a stage in Madrid and it was fun. Yeah, it was fun.

1:27Now we're back. I'm back in the United States. You're back in London. Things are back to normal. Now, listeners, I must tell you that we had a very good time in Spain, Rob and I, but We had rather too much fun one evening. Alcoholic beverages were consumed. Rob, have you recovered? I have just. We had one of, you know, a historically catastrophic hangover. The next day. Terrible. I mean, not to go into too much detail, but I think our real mistake was the martinis at the end of the night. Let's move on. Fed, Fed, Fed, Fed, Fed, Fed. The Fed, yeah. Very interesting meeting, I thought. I want to talk about what they did this week.

2:07But first, I want to talk to you about an interesting new piece of research from CEPR. Listeners, check it out online. Their main point is public perceptions of whether or not the Fed is doing a good job depend hugely on your worldview. So, as they say, individuals who believe the Fed shares their political commitments report higher trust, lower inflation expectations and greater independence. Conversely, those who think the Fed is biased are skeptical about the Fed's policy and have higher inflation expectations. Isn't that interesting that like an organization that goes out of its way to be as boring as possible attracts such wildly different interpretations of the same set of actions?

2:52Well, that's consistent with the rest of what we're seeing in the world right now. Yeah. I mean, partisanship in America, especially, doesn't really listen to reason. Right. Whether or not it's either you're political or you're not. And also most people who follow politics, I mean, I guess the biggest divide in American politics is people who follow politics and people who don't. So if you don't follow politics and you don't know that the Fed is meant to be super independent, you just perceive it as another political institution. What institution is in good standing with people in general right now?

3:24It used to be the Supreme Court, but no longer. Yeah. So it's a symptom of a wider problem. But I'll tell you, I think the Fed has done a pretty good job. I'm not one of the terrible Fed critics. Yes, they should have raised rates earlier. No, it wasn't an easy call. And since that initial mistake, I think old Jay has done a pretty good job. Jay and co, I should say. Jay and friends. So the paper says, it is an interesting read and very accessible. So check it out, listeners, if you fancy. But 66 % of Democrats think the Fed favors Republicans. 60 % of Republicans think the Fed favors Democrats.

4:03Go figure. You're not really giving anybody what they want. Yeah. That's exactly what the Fed should be doing. That's a good review. Both sides are kind of mildly disgruntled, which is right how you want it, right? Mild disgruntlement and disappointment is exactly what this podcast is after. So this is very much on brand. The conclusion of this paper, for what it's worth, is that we need more strategic communication from the Fed. I have my doubts around whether that will actually move the dollar toll. It's hard. People who are just determined to dislike the Fed. The stuff they have to communicate is so hard.

4:37Yeah, it's super hard. These are tricky things. And there's, you know, and us idiots in the back row just don't make their life any easier. Yeah. So Rob Armstrong explains the class, please. What did the Fed do this week? The very interesting thing that happened was that the Fed basically brought the bad news. Now, it didn't say it was going to raise rates, which would have shocked the hell out of everyone. The universal consensus was that there was not going to be a rate increase. But if you look at what the committee in aggregate thinks, which is captured in this rather arcane document called the SEP or the Summary of Economic Projections, which is sort of 15 pages of tables, graphs and charts explaining what the different members and the average member thinks about inflation and unemployment and et cetera, et cetera.

5:36they kind of universally thought the situation is getting worse on both axes they care about. So both on the inflation axis and on the economic growth of the employment axis, they were like, we kind of expect things to get worse. And we're really uncertain about what's going to happen, but all the uncertainty is on the bad side. Yeah. And we should note, it wasn't that they really changed radically all the projections. It was slight upticks in inflation and slight downticks in growth. Right. But both sides, they're worried about two things, growth and inflation. Both things got worse. Now, they sort of canceled each other out in terms of rate policy.

6:18So the rate didn't move. That is good. Market can breathe a sigh of relief. There's no horrible shocker in here. But it was a spooky overall picture that they painted. And so it was very interesting that the markets were kind of cool with it. Yeah, I mean, it reflects a lot of what analyst notes have said to us, which is it might be, quote unquote, mildly stagflationary. Right. Which is a strange, you know, stagflation feels like an end state. So to be mildly stagflationary is strange to me. But that's what it was. That sounds a little bit like being like a little bit pregnant. Yeah, exactly. Well, it's just a risky state to be in because it can be self-reinforcing.

6:56So just as being a little bit pregnant. Yeah, being a little bit pregnant tends to lead to being more pregnant. if things take their normal course. So, you know, and of course, behind all this was we don't understand what is going to happen with the Trump administration's policies, particularly around tariffs. And in the press conference, Jay Powell was out there. He said a couple things a million times. One of them was, we don't know what the hell is going to happen. I mean, that was kind of the continuous mantra. It's hard. It's very hazy out there. It's unusually hazy. All of the members of the committee are confused about the outcomes.

7:33And the other thing he said is, you know, we're worried about tariff policy. That is the source of this uncertainty. It came up again and again and again. But interestingly, he said that it's possible that the Fed might be able to look through price rises related to tariffs should they not change the long-term inflationary outlook. Yeah, very important point. He didn't say we're going to fight these tariffs with bayonets, rifles, and bare hands if necessary. He sort of said, we're watching it. The phrase they use is anchoring. What central bankers like to see is long-term expectations for inflation remaining anchored.

8:09That's one of those magic Fed words, anchoring. And they sort of said, if the anchor stays in place and the ship doesn't start to drift, we are prepared to look past a little bit of short-term tariff-driven inflation. I think that was the most positive message that came out of it. The thing is, the last time they tried to look through some inflation, it went quite pear-shaped. It's a good point. They don't have a great track record. It's a good point. And that poor Jay Powell was kind of goaded into using the T word. You know the T word, guys. Oh, I do. He actually said the word transitory, which to you, to normal people listening to this podcast, the word transitory might mean temporary.

8:57to finance people it means the fed is stupid

9:04and somehow he used this word anyway which is unbelievable you know because everyone just to catch people up on the history of course yeah yeah uh they use the word transitory a lot at the beginning of the pandemic inflation because they thought it was a temporary supply shock and in classically you look through temporary supply shocks and that kind of inflation takes care of itself. It didn't take care of itself. Inflation went to 9 % and everyone was very upset. And there was a lot of teasing about the word transitory involved. But then also a lot of fights because there were a lot of diehards that were like, I'm sticking strong to team transitory, et cetera, et cetera.

9:39Yeah. Yeah. There was this whole thing where there was team transitory. And I think ultimately it proved to be transitory. But it's a very... We're still in it. We're still in transit. We're still in transit. Right? Like inflation's still on it. Yeah, it's a very loaded word. I mean, what undoubtedly happened is inflation went down much faster than team anti-transitory said it was. Team persistent. Team persistent got the initial very steep and fast fall in inflation wrong. Yeah. So everybody got to be a little bit wrong. Isn't that the most American way too? Transitory, very loaded word. Yeah.

10:20Stagflation, which is not the word that he used right. But stagflation where you have. No, this does not come out. We do not say that word out loud. No. But this situation where you have a stagnant economy and rising inflation, no bueno. Nobody likes stagflation. Yeah. So how come the market didn't lose its marbles about this analysis? It's possible the market and what we've seen in the market over the last two to three weeks has just been the market already pricing in stagflation. Yeah. We have really bad sentiment data, which has not shown up in the hard data yet on the economy. But people expect there will be lower growth this year.

10:58Also, inflation has remained hot. Even though we got a kind of okay CPI report, there's a lot of people who believe that we could have hotter inflation next month or in this month's PCE, which is the measure of inflation the Fed looks at more closely. So it's possible the Fed already kind of just confirmed what the market was already thinking. Was already thinking. I think there's another, I mean, you know, it's very, it's chancy business. You get into kind of anthropomorphizing the market and saying the market thinks X or Y. But just because it's chancy doesn't mean I'm not going to do it. And, you know, I think the rate stayed the same.

11:35Powell got up there and was very measured and reasonable. Everybody in markets has been busy getting punched in the face for about a month now. And they were just ready for some good news. So kind of that's what they heard. Yeah. I think undoubtedly Aiden is right that the message had already been somewhat transmitted. But just the fact that the Fed didn't say anything even more aggressive about tightening in the future. Right. Powell sounded very measured and the rates didn't move. That was enough for markets to take a little sigh of relief. I will note that as of this morning, markets are shading down a little bit.

12:15But we see how that develops. This morning is Tuesday. Is it Tuesday? No, it's Thursday. It's Thursday. Who knew? Four-day hangover strikes again. Never again. And then the Treasury market barely moved. And that's because it looks like the course of rate changes is not going to be different, right? The consensus, as Rob said before, is if you have a little hotter inflation and a little lower growth, you keep the rates kind of where they're going to be. On top of that, we don't really have the best indication of inflation yet. It seems like the treasury market has been muted for the past month.

12:53And that's because they're waiting for more inflation data to come out to really see what the Fed might do forward. Well, it's got a lot of competing forces going on as well, hasn't it? Yeah. Yeah. And there also was some good news yesterday from the Fed meeting, which is they said they're going to start slowing down quantitative tightening. Let us now explain to regular human beings, of whom there may be a few in our listenership, you never know. Hello, humans. Greetings, humans. What quantitative tightening is. In times where the economy looked like it's going to buckle or there are issues with financial liquidity, the Fed infuses a lot of cash into the system.

13:31By buying treasures. buying treasuries from the banks and from other people in the system. So that puts cash in, but that means the Fed has this really big balance sheet. Quantitative tightening is unwinding that balance sheet. So it's allowing those treasuries to age out, to mature out. That has the potential to explode on the market because you don't really know when you have the right level of reserves and the right level of liquidity. So it's possible they overstep that and then you have some market meltdown. I will dumb that down even further. The Fed is either shoving cash into the system in the hopes that will make everybody remain calm or it is carefully pulling cash out of the system to restore some kind of sanity.

14:12So it's like putting the medication in, which is increased liquidity or cash, and taking the medication off, which is pulling it out. And the Fed has been taking the financial system and the economy off the medication. Yes. There's a lot going on this year. The Fed is theoretically concerned about conversations about the U.S. national debt and deficits, which will be probably a politically contentious issue this year. According to January's meeting notes, it looks like the Fed is concerned about having quantitative tightening coinciding with questions around the U.S. national debt. The U.S. national debt is really big, and there's going to be some big political conversations about how we're going to rebuild the Treasury this year.

14:51When the treasury does eventually start issuing more debt, that pulls out cash at the same time, theoretically, as the Fed will be pulling out cash from the system with QT. So the idea is the Fed wants to avoid clashing with the treasury when the treasury starts to rebuild its debt later this year. There was also an interesting point about it, which was that the chairman, Jay Powell, kind of bent over backwards a bit to say this has nothing to do with the debt ceiling or political situation or anything else. This is a purely technical maneuver. Yeah. But if you look at the January minutes, the reason they said we're going to pull it up is explicitly because of concerns about the deficit.

15:30So, you know, it's one of those things that almost always in some way means it's opposite. It's like, you know, when you see a sign that says no exit, it means there's an exit there. And similarly, when a central banker says this is a purely technical maneuver, what they mean is this is not a purely technical maneuver. Right. Because otherwise they wouldn't have to point it out. You're a very paranoid person. Yeah. My work is maybe cynical. Also, I'm concerned what happens to you if there's a fire in a building. You'll run towards the no exit sign. Let's not try that out. But like speaking of the U.S.'s just bin fire politics, I noticed that Donald Trump president was like posting away on Truth Social after the Fed decision saying they should cut interest rates now.

16:20And I am old enough to remember when this would have been like a huge deal in markets that the president would say anything at all about Fed policy. This is just like not the president's domain at all. And normally presidents go out of their way not to not to interfere. I just think it's in public. They do. We have a we have a proud tradition of presidents being awful to the chairman of the Fed board behind closed doors. Even when it's somebody they appointed, as in this case, where Trump appointed Jay Powell. Yeah. So that's been going along. I think, you know, you know, the theory, you know, Lyndon Johnson threatening the chair with violence, I think, is something that may well have happened.

17:03But he threatened a lot of people. He did that. But I agree there's you know, this is one of many changes in tone in the current administration that they will say outright. They don't sort of respectfully disagree, which might be as far as another president might have gone. They say you're getting it wrong. Please do something different. But what's interesting as relates to what Katie mentioned earlier is people's perception of the independence of the Fed. If you ask some people in Trump's economic circles and Trump's orbit, they also have concerns about the independence of the Fed. But their point is it's about the personnel.

17:35So when you ask them, it's like, oh, it's not that the Fed is independent. We just don't think the people in the Fed have an independent spirit in mind. Basically, it's a bunch of Democrats is the claim made against them. And I think looking at the donations they make, which are a matter of public record, it is, broadly speaking, a bunch of Democrats. But Jay Powell's Republican. He sure is. I mean, there's plenty of them who are conservative or just nonpolitical. Right. And if they're doing their jobs, they're not in politics. How about that for a beautiful narrative arc that takes us right back to our initial point, which is no one trusts the Fed?

18:09No, I think they do. Which isn't quite true. I think they do. And I think, you know, there's always going to be a lot of criticism. There's always going to be a lot of noise. But we know, to the degree we know anything at all in economics, we know that independent central bank is better for your economy than a central bank that works for the executive. This is a well understood point. And right now, I think, you know, in their heart of hearts, the people who matter believe that is happening still. Chairman Powell, if you're listening, we know you're doing a very difficult job. Good luck to you.

18:48We are going to be back in just one second with Long Short.

19:03Okie doke, it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Aidan, I'm going to pick on you first. I am short Turkish democracy. Not that I'm against Turkish democracy, but I'm concerned over the recent moves by President Erdogan to imprison his chief rival. No market or no economy does very well when the rule of law breaks down. And there's been problems in the past in Turkey with Erdogan both not respecting the rule of law and not respecting economic policymakers, which allowed inflation to just kick off and really, really caused a lot of pain.

19:38So a lot of investors, a lot of people are concerned now that since he's not respecting the opposition, he will no longer respect the central bank as he has for about two years now. Yeah, it's all a bit of a flashback to a very dark time in Turkish markets. Ish. Rob, tell us what you got. Pair trade. We all know that the value of Tesla has been falling like a stone. But there was a nice story in the FT that according to its latest fundraising round, the value of Twitter, now called X for reasons known only to Elon Musk, has gone up a lot. You know, for briefly, it was like a$10 billion company according to one valuation round.

20:17Now it's over 40 again. But it's about this price that he bought it for. Yeah. Yeah, no, that's fine. But I think what we've learned is Elon Musk is getting better as a social media star and worse as a car company executive. And I expect those trends to continue. So I am long Twitter and short Tesla. How about that? I am long of a story I'm loving today about how Europe has caught the meme stocks bug. Did you see the story? No. Our colleagues, Murray, Jamie and George, wrote a really fun story about how you remember how the US went like nutty in that COVID period where a bunch of retail traders started trying to take down hedge funds and bet really heavily.

21:04I saw the movie. Yeah, it was great. Yeah, so there were people betting really heavily on stocks like GameStop that hedge funds hated. And anyway, it's happening in Europe now. There are like message boards on Reddit for like French retail traders and German retail traders who are doing stuff like piling into Luxembourg-based satellite companies and tiny, tiny German defense stocks to try and bring down the bad guys. One of them said, I know, one of them was saying, I don't care about profit. I just want to pool some of my money to help and move away from U.S. assets and asset managers. Booyah!

21:40Fun times in European markets. I love it. Wow. That stings a little bit. It stings and it's not very European. Like, you know, it all kind of links back to this idea that European markets are back, baby. We've even got meme stocks and everything. Who knew? Take all the good and all the bad. Yeah, exactly. Yes, we don't want all of your American nonsense, just bits of it. Listeners, we will be back in your ears on Tuesday. I definitely do know what day it is. Thursday today. Tuesday next time we have the podcast go out. So listen to us then. Unhedged is produced by Jake Harper and edited by Brian Erstad.

22:20Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Seidler. FT premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.

23:02The Central Banker emerges from his pooper in the spring in order to set monetary policy for the new year. But look on the horizon. It's a rogue trader.