Good and Evil Angels Whispering in Powell's Ears

Like proverbial good and evil angels sitting on opposite shoulders of Powell, the one whispering “higher for longer”, became quieter last week, while the ones whispering “cut now” began to shout. The inherent negative message made markets nervous.

One angel, represented by ex-Fed president Dudley and respected market commentators such as Mohamed El-Erian said published op-eds on Bloomberg.

Bill Dudley, who served as the president of the New York Fed from 2009 to 2018, and the vice-chairman of the Fed, wrote an op-ed titled “I Changed My Mind. The Fed Needs to Cut Now”. Highlights include:

• The facts have changed so Dudley has changed his mind from “higher for longer” to “cut now”.

• Pandemic saving have been drained.

• Only the wealthiest of households able to maintain spending.

• Lower income levels are being squeezed by high rates.

• Housing is faltering.

• Unemployment is rising and the labor market is weakening, which has the propensity to create a self-reinforcing feedback loop.

Mohamed El-Erian, former chief executive officer at PIMCO, and chief economist at Allianz, also wrote last week “The Fed May Be Two Meetings Away From a Policy Mistake”.

• The Fed is risking a policy mistake by not easing now.

• Waiting will cause undue damage to the economy.

• Pain of higher rates is being concentrated in low income and small businesses.

• The 2.0% inflation target is flawed based on current market dynamics.

The other angel, was represented at the constant worry about inflation, where short-term good news is always being questioned. Most recently because seasonality may dictate that further disinflationary progress is running into problems with the calendar. To compound the worry, although goods inflation appears to be contained, services inflation is still and issue.