Powell's Verschlimmbessern Fed

Authored by Peter Tchir via Academy Securities,

According to wiki, verschlimmbessern is to make something worse in an honest but failed attempt to make it better

Other working titles for today’s T-Report included

  • So Much Communication, So Little Information

  • The Over-Engineered and Micro-Managed Market

  • The Catch-22 of Fed Policy

  • Why do Today what you Can do Next Meeting?

  • I’ll Gladly Cut Next Meeting for a Market Move Today

The titles all convey the same sentiment – that the Fed has gone overboard in terms of trying to manage expectations and is distorting markets and creating confusion.

If You Are Going to Buy Insurance, Why Not Buy it Now?

If the Fed’s rate cut is supposed to be an “insurance cut”, why not do that back in June? 

What was the thought process?  Yeah, I live in a flood plain, yeah, it’s the rainy season, yeah, the river is running high, but I was kind of hoping to lie on the couch and watch the game.  Maybe I’ll buy that flood insurance next month?

If we ‘needed’ an insurance cut, why didn’t we get it?  Because it wasn’t needed?  But if it wasn’t needed in June, why after some good data, is it needed in July? 

After a Decade of Failing on Inflation, Let’s Wait 1 Month and then Panic

Let’s ignore for a moment that many people question how relevant the common inflation measures are to today’s economy.

Let’s ignore for a moment the fact that the Fed’s favorite measure of inflation barely beats the alleged 2% target.  The PCE didn’t even average 2% during the 8 years before the financial crisis, let after the financial crisis.

Let’s ignore for a moment how we came up with 2% as being some optimal level of inflation.

Let’s ignore for a moment the chart Academy sent around yesterday, highlighting that for all the academic/wonkish discussions on inflation expectations, they are pretty much just correlated to the price of oil.

But let’s not ignore the reality that if you are “committed” to inflation, then why wait a few more weeks?  Is inflation going to miraculously appear out of nowhere?  I understand about waiting to start a diet next week or next month, because there is always an excuse, but fighting the ‘dreaded’ deflation monster seems like something you should start today if you really believe it.

So, does the Fed desperately want inflation or was that just a good talking point to help markets along?

Everyone is Data Dependent Until the Data Doesn’t Support the Narrative

Since the last Fed meeting, the data has improved slightly.  The Citi economic surprise index, while still negative has ticked higher.

Trade tensions between the U.S. and China have subsided recently.

The ECB is in the midst of a dramatic makeover that could mix politics and monetary policy in a potentially positive way to step up growth.

If the data wasn’t bad enough to cut rates last month, why is it bad enough now?


This word has nothing to do with today’s T-Report, but it is my favorite word in the English language.  Seriously, how can you not love a word that means “glee at another’s misfortune”?  Verschlimmbessern pales in comparison (and yes, I have issues ).

Do You Do What the President Tells You?

Personally, I’m about 50/50 on responding well to being told to do something.  My caddy tells me to slow down my practice swing.  You know the next practice swing is going to be my fastest of the round.

So how does the Fed, and Powell in particular, respond to the pressure from the administration to cut rates?  Do you do it?  Do you fight it?  Are you mature enough to not be tempted to go against the constant unwanted ‘advice’?

Has the situation changed enough that you can back off the dovish rhetoric and prove you are ‘independent’?  I think the Fed will restrain themselves on this front, though it must take a lot of effort for such successful people not to want to push back on so much unwanted interference.

Do You Risk Disappointing the Market?


What to Expect?

The Fed to double down on their concerns about a lack of inflation. 

If the Fed wants to cut, mostly to appease markets, they will lean heavily on the inflation excuse.

Expect Powell to try and be as dovish as possible and fixate on inflation, or the lack thereof in the coming days.

It isn’t logical that they didn’t cut in June, but seem likely to cut in July, but it didn’t seem logical to ignore balance sheet reduction while hiking last year, so let’s not let logic stand in the way of trying to figure out what the Fed will do next.