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Francis Scotland, Director of Global Macro Research, Brandywine Global
US monetary policy announcements can be cryptic at times. Not so the last Federal Open Market Committee meeting. The January 30 press conference was the final act to some dramatic theatre that does play out from time to time at the Federal Reserve (Fed). The earlier acts in this drama unfolded: new guy becomes Fed Chair; asserts his own style; becomes emboldened by his own view; makes a mistake in judgment; attempts to stick to his guns despite spreading criticism; eventually, he is taken to the woodshed by the market. In the final act, he returns humbled and sets things right again.
Financial history is replete with examples of new Fed chairs facing a character-defining baptism by fire early in their tenure. In this instance, Fed Chair Powell has been humiliated by the markets for his October judgment that the neutral rate was probably a lot higher, not to mention his general disregard most of last year for the impact of US policy on the rest of the world, the impact of the global economic slump on the US and the effects of a shrinking balance sheet. The policy has come full circle on these points. Yet at the January 30 press conference, the normally plain-spoken Fed chair was evasive and unresponsive to questions seeking explanations for the policy U-turn. It’s not hard to conclude that he was embarrassed to admit that he made a mistake. He even said “we’re human, we make mistakes but we’re not going to make mistakes of character” in response to a question about whether it was pressure from the White House that prompted the radical change in policy stance.
In practical terms, this probably means that the Fed is not going to do anything for the next six months. To be human is to make mistakes and the Fed Chair is to be commended for reversing course as decisively as he did. But it is also human not to want to be humiliated again, especially anytime soon. This should be good news for risk takers. The case for a re-test of the December lows in share prices seems weakened with the Fed frozen for the moment.