Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

NY Fed President Just Admitted Ignoring The Bond Market… I Have A Theory

Interest-Rates / US Bonds Jul 03, 2017 - 03:47 PM GMT

By: John_Mauldin

Interest-Rates

Speaking at a Business Roundtable event, New York Fed President William Dudley reportedly expressed great confidence in both the economy and the Fed’s policy moves.

Dudley is not even slightly concerned about the Fed’s overshooting with its rate hikes. In fact, he is supremely confident that inflation will overshoot if the Fed doesn’t tighten policy.


Even more disturbing, a MarketWatch story says that Dudley remarked that he “is not paying much attention to signals of concern from the bond market.”

Read that again.

The NY Fed’s president is a permanent FOMC member because he is closest to the bond market and is responsible for executing the Fed’s trades. Yet by his own admission, he ignores the market’s concerns.

That’s kind of an important signal. Dudley’s job is to listen to it. If he’s not listening, why not?

I have a theory.

Great Fed Rotation

All this is happening as the Fed is on the cusp of drastic change.

The Federal Reserve System has a seven-member Board of Governors. Three of those seven seats are now vacant. President Trump has not nominated anyone yet. Although two names have been floated in the press (including NIRP lover Goodfriend).

Even if Trump were to nominate them tomorrow, they would still have to go through Senate confirmation, and the Senators have a lot on their plates.

Meanwhile, Janet Yellen’s term in the chair expires on February 8, 2018. And Vice-Chair Stanley Fischer’s term ends in June 2018. Their board terms are separate, so in theory, both could remain governors after their leadership terms expire.

But most observers expect them to retire.

So, if things go as expected, Trump will have two more seats to fill. This means we are one year away from a Board of Governors with at least five of the seven being Trump appointees.

And it seems highly likely that Lael Brainard will not stick around much longer after Yellen leaves, and then the only question remaining is whether Jerome Powell steps down.

President Trump does not appoint the regional Fed bank presidents. They answer to their own boards, which comprise of bankers from their regions. So the FOMC has both political appointees and commercial bank representatives. It was set up that way on purpose.

But it’s also no accident that the political appointees constitute a majority—or will when more Trump appointees take their seats.

Hawkishness Out of Political Necessity

The FOMC works by consensus.

Most of its decisions are unanimous or almost unanimous. Fed chairs strive to get everyone on the same page. It’s also important because banks and private businesses want to see stability.

Enter Donald Trump, for whom stability is a lesser priority.

The FOMC members must see what is coming. Their beloved unity is in danger, and I doubt they are pleased. I believe a faction on the FOMC wants to cement its own preferred policies in place and make it difficult or impossible for a new majority to change course in 2018 or afterward.

Yellen, Fischer, and Dudley all seem to be of that mind, and they are now taking a hawkish approach to monetary policy. That’s why they don’t want to do the otherwise sensible thing, which is to wait for more evidence that inflation is a problem before tightening further, especially so late in the recovery cycle.

Can Trump fire Fed governors, like he did the FBI director? Maybe. The Federal Reserve Act says governors can be “removed for cause by the president.” He could certainly find cause if he wished to do so. But firing Fed governors would send a horrible signal to markets.

Far better to give them incentives to resign, which could be done quietly. And frankly, I think those around him would let him know that firing would be a really bad idea. Just not done. Independence of the Fed and all that…

In any case, right now we have a Fed that is arguably letting its own parochial political concerns seep into its policy decisions. By raising rates when inflation is nowhere near problematic, they risk tipping the economy into recession.

We’re overdue for a recession anyway, and I get that they want to have room to cut rates if necessary. But that will be cold comfort if their own actions trigger the recession. But it even goes further than that…

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in