‘Jay And I Could Never Be Made’

Since the day she was tipped as Joe Biden’s Treasury Secretary, I’ve joked (or not) that Janet Yellen was de facto Fed Chair.

She lost the job only because Donald Trump wanted “his own” Chair, a decision which backfired in rather spectacular fashion in 2018, a year which began with an equity market melt-up predicated (in part anyway) on tax cut euphoria, quickly went awry when Yellen’s short vol bubble imploded on the very day Jerome Powell assumed her role and ended with the worst December for US stocks since the Great Depression.

Part of the problem was Trump himself, but Powell’s infamous “long way from neutral” misstep is widely “credited” with sparking the Q4 2018 mini-bear market, which was exacerbated by balance sheet runoff and a looming government shutdown.

The White House-Fed dynamic (something which isn’t supposed to exist, or at least not in full view of the public) reached its nadir during that year’s horrendous Christmas Eve session, when Trump took to Twitter to exclaim that Powell “doesn’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders.” He continued: “The Fed is like a powerful golfer who can’t score because he has no touch – he can’t putt!”

On January 4, 2019, at an event with Yellen and Ben Bernanke, Powell began the policy pivot which, were it not for the pandemic, would have defined his legacy as Chair.

Fast forward to 2021 and Yellen, in her capacity as Treasury Secretary, is running point for Biden as he tires to reshape American capitalism. She’s also making foreign policy. A few weeks ago, for example, she effectively decreed an end to Trumpism on the world stage. (Sweet revenge.)

Importantly, we now live in a world governed by fiscal-monetary “partnerships,” wherein the latter (monetary policy) enables the former (fiscal largesse). Of course, that’s long been the case, but in the post-pandemic world, it’s (far) more explicit. Indeed, it’s now readily apparent to the public. The figure (below) isn’t all that difficult to understand.

Given the current policy conjuncture and the necessity of spending copious amounts to reimagine America’s economy, Yellen and Powell would be coordinating on rates, QE and Treasury issuance anyway. But it’s important to grasp the nuance.

Powell’s CV is enviable, to put it mildly. Simply put: He’s qualified to run your company, whoever “you” happen to be and whatever you happen to be selling. But that’s the private sector. In economic circles, Yellen is a giant (even if she was, according to Trump, too short to be Fed Chair). And because, for better or worse, central banks run on an ivory tower mentality, Yellen carries far more weight than Powell, who can never really join the economist club. It’s like Goodfellas:

But Jimmy and I could never be made because we had Irish blood. It didn’t even matter that my mother was Sicilian. To become a member of a crew you’ve got to be one hundred per cent Italian so they can trace all your relatives back to the old country.

This is why markets were stirred Tuesday by Yellen’s remarks to the Atlantic. Traders didn’t hear the Treasury Secretary say “interest rates will have to rise somewhat to make sure our economy doesn’t overheat,” they heard the Fed Chair say it. In the same set of remarks (actually recorded Monday), she described the possibility of “very modest increases in rates.”

Later, Yellen “clarified.” “I don’t think there’s going to be an inflationary problem, but if there is, the Fed can be counted on to address it,” Yellen later told a Wall Street Journal event.

“It’s not something I’m predicting or recommending,” she said, of the rate hikes she pseudo-predicted just a day earlier. “If anyone appreciates the independence of the Federal Reserve, I think that person is me.”

Duly noted (on the latter point), but in this case, that’s an exercise in question-begging. You’re not violating “Fed independence” by weighing in on the future of monetary policy if you’re synonymous with the Fed. Think of Judge Dredd: “I never broke the law! I am the law!”

“Rates aren’t the Treasury Secretary’s job to comment on – EVER. Yes, there is the same need for endless hockey-stick-projection optimism on growth, the same silken spiel, and the same one-size-fits-all Panglossian policy prescriptions of various vintages in both roles, but there is a separation of powers between the two,” Rabobank’s Michael Every wrote Wednesday, before asking what the “correct verb” was if Yellen wasn’t “predicting or recommending,” as she later insisted. Was she “Speculating?” “Hypothesizing?” “Imagining?”, Every wondered.

“The impact of [Yellen’s] comments highlights the delicate situation as investors and traders strive to understand and test the Fed’s new and expanded reaction function,” Bloomberg’s Garfield Reynolds remarked.

Last weekend, Yellen again played down the potential for Biden’s fiscal policies to stoke a sustained rise in inflation. On Wednesday, in the same note, Rabobank’s Every quipped that “ironically, the only way in which Powell –and Yellen– can be sanguine about this is in the knowledge that even if prices go up, US wages almost certainly won’t.”

Yellen will join the White House briefing on Friday, Jen Psaki told reporters Tuesday. Maybe she’ll announce WAM extension.


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5 thoughts on “‘Jay And I Could Never Be Made’

  1. Isn’t the risk of inflation due more to Trump’s China policy- supply chain issues- causing scarcity and delays in deliveries of goods as well as the pandemic’s effect on workers being laid off as demand for some goods declined. Seems like corporations were tightening their belts over the last year and are now trying to gear up.

      1. I’m not a pro but from what I know about typical strategic management practices, I’d be surprised the problem is fully resolved for Christmas. Getting the whole pipeline refilled, containerized and shipped with everything needed will be tough. It also seems like labor, especially for low skill services, may stay tight (look at signs on storefronts not public data). Everything I’ve been trying to buy is delayed, in short supply, backordered or just plain canceled. I just ordered something from a brand new late spring catalog and got a note I can look for the item in August if I still want it. Keeping inventory to reduce the bottlenecks of disrupted JIT supply chains costs a firm 20-25% in direct and opportunity costs from the capital needed to support that inventory. So, every extra million kept in inventory for the year (not that old but the balance is always there) takes 200k out of profits. When that backup disappears it can take a long time to put it back, especially if the revenue flow required to support it is uncertain and even one key supplier fails to commit. A supplier holding back one or two chips can stop the whole auto industry.

  2. Yellen was just stating what everyone already knows. Unless, of course, Wall Street is betting on the U.S. racing Japan to the ZIRP singularity.

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