For the past year, a strawman phrase used repeatedly by the Fed to grant itself a green light to do whatever it wants, is that it needs to see “substantial further progress” before it tapers, hikes, tightens, etc., i.e. changes the current regime of $120BN in liquidity injections every month (which judging by today’s near record $965BN reverse repo end up right back on its balance sheet).
During today’s presser, first CNBC’s Steve Liesman and then several other reporters pressed Powell on what this most insidious of Fed phrases means, and in what was the most clear response by Powell, the Fed chair said that “substantial” basically refers to strong job numbers and progress toward maximum employment. Notably this means that the Fed isn’t even remotely worried about soaring inflation, and the gating factor to tapering, hiking, etc, will be the unemployment rate, and – in light of the Fed’s Social Justice Warrior mandate – most likely the black and hispanic unemployment rates which will take a long, long, long time to normalize (if ever).
Furthermore, Powell underscored the lack of inflation concerns in a subsequent question, when asked about language in the FOMC statements from March and April regarding inflation not being present, Powell said the Fed isn’t considering that language as inflation phrasing was associated with ‘liftoff’ which the US economy is nowhere close to (first we need to taper $120BN in QE which will not be done until the end of 2022 at best). And since the Fed is more than a year away from that point, Powell said they’re not considering that question.
In other words, the only thing the Fed cares about is employment which is now the Fed’s only mandated; inflation is not even on the radar. Meanwhile, oblivious of surging inflation, Powell remains convinced that this is a transitory move which will reverse (despite conceding higher inflation is coming in the near-term), the Fed chair just came off as far more dovish than even the biggest bulls had expected. If anything, only much, much higher inflation can cause the Fed to reassess although with core PCE at 3.4% one wonders just how high inflation has to get.
And since many market participants have been worried that the Fed would have to act proactively to contain soaring prices at some point, Powell surprisingly stark and dovish assurance that markets should not be worried about inflation – but merely about the still very high unemployment rate – is all it took to send spoos to session highs…
… and hammer the dollar.
Perhaps the only surprise is that yields aren’t playing along and tumbling just yet.
