By Eric Peters, CIO of One River Asset Management
“I need to decide,” whispered Biden to himself, struggling, unsure.
“Lael is just terrific, no doubt, and her Fed wouldn’t dare cut off my funding,” thought the President, old enough to remember bond vigilantes.
“But you can’t help but like Jay, a fine gentleman, a decent human being, and face it, he’s still buying over $100bln of bonds a month with CPI humming hotter than 6%,” thought Joe, having lived through the 1970s inflation. Heck, he was born during WWII and grew up during the post-war financial repression.
“Hard to say we need someone more dovish than Powell,” whispered Biden. But of course, all such considerations were beside the point and Joe knew it deep down.
The only thing that mattered now, was whether it would be better to fire Powell before or after the Democrats lose mid-terms. Because at this point in the cycle, Jay’s greatest political value is in being a scapegoat.
“Climate chaos is an urgent threat to our health, communities and economy,” tweeted Senators Merkley and Whitehouse.
“We need a Fed Chair who recognizes the urgent need for bold climate action. That person is not Jerome Powell,” they added, the scent of mission creep thick in the air.
In 1977, following a horrendous run, Congress tasked the Federal Reserve with an oxymoron – a dual mandate with three objectives: maximum employment, stable prices, and moderate long-term interest rates. And having been born of original sin, into a world where 1+1=3, the central bank’s mandate quite naturally propagated. Slowly at first. Then faster. Until there appeared almost nothing in economics and politics that resided outside the Federal Reserve’s mandate.
In 1998 it added to its mission the necessity of bailing out wildly overleveraged hedge funds managed by PhDs with more Nobel prizes than imagination. Blinded by math, they failed to conceive of the possibility that historically stable correlations could break for no reason but for the fact that markets inevitably find a way to inflict the greatest possible pain on those who lack humility. Ever since, in each downturn, the Fed bailed out such characters, always in greater size.
It takes an active imagination to envision a world where the Fed is unwilling or unable to fulfill this mandate. Which makes this a real risk. But the central bank’s mandate expanded in far wider ways. In pandemics, the Fed funds the government and buys mortgage bonds, even as house prices surge.
Some Senators now call on the Fed to “recognize the urgent need for bold climate action.” It is neither right nor wrong that the Fed does so, it is simply a mandate choice.
And the central bank can do anything, everything, just so long as we continue to believe that money is real. Which of course it is not. And inflation is the one thing that can pierce the illusion.