BY JOHN MAULDIN
The mainstream media is packed with criticism of Jerome Powell’s press conference.
The market didn’t like what it heard and immediately tanked. People called him tone deaf for not listening to the market.
What was Powell thinking?
There were many accusations that Powell fumbled the ball, not telling the market what it wanted to hear. As if that were his job.
I think Powell may have said exactly what he wanted to communicate.
The Fed’s Unofficial Mandate
The last three Federal Reserve Chairs have acted like the Fed has three mandates. Two are official ones: low inflation and full employment. And there’s an unofficial third one: making sure asset prices rise as the market wants.
Not just the stock market, but real estate and all other investment assets. It started with the Greenspan “Put”, morphed into the Bernanke “Put”, and reached its apex with the Yellen “Put”.
And what did we get? A series of bubbles.
- When Greenspan kept rates too low for too long in 2003–2004, we got the housing bubble and Great Recession. He clearly helped the massive bubble in 1999–2000.
- Bernanke’s reluctance to raise rates above zero in 2012–2013—when the economy was obviously recovering—prompted the asset price bubble.
- Yellen continued that course. Her reluctance to raise rates until Trump won the election—all while the economy was booming and unemployment falling—was inexcusable.
I think Powell wasn’t being tone deaf at all. He may have wanted to remind everyone that the Fed is independent from Wall Street as well as politics.
Yes, Powell worked on Wall Street. He was an investment banker, and even ran his own hedge funds. So he is clearly an “insider.”
He is also wicked smart, maybe even wicked brilliant. He didn’t stumble or mumble at his press conference. He was quite deliberate. He knew exactly what he was saying and I bet he knew the market would react negatively.
You cannot have his resume and not know exactly what the market would do given his quite careful press conference.
This makes me think Powell is perfectly willing to walk away from that unofficial third mandate. Is he letting his inner Volcker show just a little bit? If so… damn, Skippy, it’s about time!
A Fed Policy That Serves Main Street
The Fed should be just as concerned about Main Street as it is about Wall Street.
The serial bubbles of the last 30 years had serious negative consequences. Yes, the ride was often fun. And some of us made good money in both the up and down cycles. But Main Street would be better served with a steady-as-she-goes Fed policy.
Wall Street should create earnings and value companies based on those earnings. Instead, it games the system to the point where valuations get incredibly stretched and then the bubble pops.
It kills the average investor who buys late in the cycle and then gets scared out of the market at exactly the wrong time. People come to see investing as a game Wall Street plays for its own benefit.
In fact, it is anything but a game. To most people, investing is about retirement and life.
Will Powell “Crawdad” on Us?
How will we know if Jay Powell is serious about his inner Volcker? In Texas, we would look to see if he “crawdads” on us.
Let me explain that.
I grew up in West Texas where farmers and ranchers would create ponds to catch and hold rainwater for the cattle to drink.
Little creatures we call crawdads (which look like tiny lobsters) would burrow holes around these tanks and live happy little crawdad lives.
Then some young kid would come along, throw a small piece of bacon with a string attached to it in front of their home. When they would come out and grab the bacon, you would jerk the string, put the crawdads in a bucket, and sell them.
When crawdads sense danger, they start walking backwards to hide in their hole. Hence the term, “Are you crawdadding on me?” Meaning, “Are you backing away from what you said or want back what you gave me?”
It was generally not said in a polite manner. To crawdad on someone meant you broke your word.
If Powell lets the markets fall and doesn’t crawdad on us by being dovish, then we will know he really wants to end the third mandate.
That would make me stand up and applaud. Loudly and with enthusiasm. Will it cause me personal pain? Sure. I’m trying to sell my home now, and what he did probably won’t help real estate values.
That being said, if Powell really sticks to his plan, the US and the world will be better in the long run. Especially if his successors at the Fed do the same. They should politely take the president’s call, ignore the tweets, and set their own independent course.
Will there be a time to cut rates? Absolutely. And I fully expect Powell to do it when unemployment starts to rise or deflation rears its head. But not because of some tantrum in the %#$! markets.
That is not the Fed’s mandate.