Fed pivot is DOVISH? Kocherlakota's latest OpED
Given the ‘adult swim’ currently taking place in global markets, I thought this reminder by a former central planner might be of some use.
The Fed’s Pivot Is the Opposite of Hawkish
The central bank’s policy stance is actually much more dovish than it was a year ago. This doesn’t bode well for the economy.
By Narayana Kocherlakota
December 20, 2021, 6:00 AM EST
Much has been written about how the U.S. Federal Reserve has pivoted to a more “hawkish” stance, leaning toward fighting rather than tolerating inflation. But has it? On the contrary, I would argue that it has done the opposite over the past year — a move that likely has more to do with markets or politics than with what’s best for the economy……What might explain the Fed’s behavior? It can’t be the central bank’s new monetary policy framework, which entails allowing inflation to overshoot the Fed’s 2% target to make up for previous downside misses. That was announced in August 2020, so would already have been in effect last December.
The remaining explanations are markets and politics. The Fed might be keeping interest rates low to avoid shocking investors, who have become accustomed to monetary accommodation – a modern version of the “Greenspan put,” the widespread belief that the Fed would always step in to prevent asset prices from falling too rapidly. Also, Jerome Powell might have become more dovish to curry favor with the Biden administration during the long process of reappointing him for a second term as Fed chair. This political influence will only get stronger as Biden makes more Democratic appointments to the central bank’s board of governors.
Unfortunately, these motivations have little to do with achieving the optimal longer-term outcome for the economy — and increase the risk that inflation, already running well above the central bank’s target, will eventually get out of its control.
Emphasis mine. Perhaps the markets have not yet seen / heard this one yet OR they have and just don’t care. POSITIONS into years - end (rebalance) might be more powerful (underestimated) than previously believed? Here’s a visual from one of global Wall Streets weekend notes on US equities
#GotBONDS