Fed Head, Jerome Powell, is not an economist. He’s a politician who made a lot of money at the Carlyle Group. He has an undergraduate degree in politics and went to law school. After working for awhile as a lawyer at a big Wall St. firm, Powell migrated to investment banking at Dillon Read. Powell must have built a relationship with Nicholas Brady at Dillon Read, because he jumped from Dillon Read to positions in Brady’s Treasury Department under George H. Bush. From there he took an ill-fated position at Bankers Trust and was somehow connected to the big derivatives scandal that eventually forced BT into the arms of Deutsche Bank. Information about Powell’s role at BT have been cleansed from the internet but he resigned from BT after Proctor & Gamble filed a lawsuit that exposed a large derivatives scandal.
The point of this is that it would be a mistake to analyze anything Powell says in his role as Fed Head as anything other than the regurgitation of previous oral flatulence emitted by Bernanke and Yellen. First and foremost, Powell’s agenda will be to protect the value of private equity investments at firms like the Carlyle Group. In this regard, Powell’s wealth preservation interests should have precluded him from assuming the role of Fed Head. Then again, he’s not an economist. The last Fed Head who was not a trained economist was G. William Miller, appointed by Jimmy Carter in 1978. How well did that work out?
While many “analysts” have looked to statements made by Powell in 2012 that expressed a somewhat “hawkish” stance on monetary policy, it’s more important to watch what the Fed does, not says. Since the balance sheet reduction process was supposed to begin starting in October, the Fed’s balance sheet has been reduced from $4.469 trillion as October 16, 2017 to $4.458 trillion as of February 21. “Qualitative tightening” of just $11 billion. This is well behind the alleged $10 billion per month pace that was established and highly promoted by the Fed, analysts and the financial media.
Powell stated to today that the Fed will continue with “gradual rate hikes.” What does this mean? Over the last two years and two months, the Fed has implemented five quarter-point rate “nudges.” Less than one-half of one percent per year. Since 1954, the Fed Funds rate has averaged around 6%. This would be a “normalized” Fed Funds rate. Based on the current rate of Fed Funds rate “hikes,” it would take six years from December 2015, when the “rate nudges” commenced, to achieve interest rate “normalization.”
But here’s why it will like take a lot longer and may never happen:
The chart above shows the dollar amount of consumer debt that is in delinquency. It was $33.3 billion as of the end of Q3 2017. It is at the same level as it was in Q2 2008. The data is lagged. I have no doubt that is likely now closer to $36 billion, which is where it was in Q3 2008. If anything, we will eventually see “faster-than-gradual” drops in the Fed Funds rate.
With Government, corporate and household debt at all time highs, and with delinquency rates and defaults escalating quickly – especially in auto and credit card debt – the only reason the Fed would continue along the path of tightening monetary policy as laid out – but not remotely adhered to – over two years ago, is if for some reason it wanted blow-up the financial system. Au contraire, hiking rates and shrinking the Fed’s balance sheet is not in the best interests of the Too Big To Fail Banks or the net worth of Jerome Powell.