Ring: Time to Watch the Fed Again

• Inflation has cooled, so the markets are pleased.
• But Lael Brainard will leave the Fed, so the chief “dove” is gone.
• She will lead Biden’s National Economic Council.

Usually, when I get my morning cappuccino from my favorite cafe, I gently scroll through the financial news sites to get an idea of what I should write about.

Today, there’s so much gook clogging the newswires. I couldn’t believe it.

“Where’s Greta?” was my first thought while watching the environmental disaster in Ohio unfold.

The EUseless has just banned petrol and diesel cars from 2035. (Good luck with that!)

But I’ll tackle the Brainard move instead. Federal Reserve Vice Chairman Lael Brainard is leaving the Fed to head the National Economic Council.

It’s an interesting move from a career perspective. I think Brainard thought she’d never get the top job at the Fed, so she moved laterally.

As for what the implications of her move are, let’s have a look.

Inflation Update

Quickly, inflation cooled slightly at the start of 2023 to 6.4% in January (year-on-year). Energy, housing, food, and other items kept the pressure on prices.

Month-on-month, the CPI rose 0.5% in January from December, compared with a previous 0.1% increase.

Since we had already had our big inflation burst in 2022, it’s more important to look at the monthly numbers than the yearly ones.

But good friend and Rundown writer Jonathan Rodriguez wrote this on our bulletin board yesterday:

I hate to be the bearer of good news, but even with several months of hot prints… inflation is still on the downswing. In fact, CPI would still drop below Fed Funds (450 bps lower bound) by May with three straight months of 0.5% MoM increases.

Fair enough.

But why is what Jonathan is saying important?

Because if the CPI is higher than the Federal funds rate, it indicates inflation is increasing faster than the Fed’s target. That leads to a decrease in the dollar’s purchasing power and harms the consumer.

Then, the Federal Reserve would have to keep raising interest rates to curb inflation.

On the other hand, if the CPI is lower than Fed funds, it shows there is a risk of deflation. Keynesians fear deflation because they think it leads to decreased consumer spending and business investment.

In this case, the Federal Reserve would lower interest rates to stimulate the economy.

Jonathan is saying that we’re close to the end of rate hikes. And maybe close to the beginning of rate cuts.

That’s a big positive for the stock market.

The FOMC and Rate Hikes

But something’s happened at the Fed.

Lael Brainard has resigned from her position as the Vice Chairman of the Federal Reserve to become the Director of President Biden’s National Economic Council.

Ok, let’s get some things straight.

The FOMC, or Federal Open Market Committee, is the monetary policy-making body of the Federal Reserve System in the United States.

The committee makes decisions regarding monetary policy, mainly setting interest rates, to achieve the Fed’s dual mandate of promoting maximum employment and stable prices.

The FOMC has 12 voting members, including the seven members of the Board of Governors of the Federal Reserve System (including Brainard) and five of the 12 Reserve Bank presidents.

The Board of Governors

Jerome H. Powell, Chair

Lael Brainard, Vice Chair*

Michael S. Barr, Vice Chair for Supervision

Michelle W. Bowman

Lisa D. Cook

Philip N. Jefferson

Christopher J. Waller

The Chair of the Board of Governors also serves as the Chair of the FOMC. The FOMC meets eight times per year to review economic and financial conditions and make monetary policy decisions.

Now, why is Brainard leaving important?

She’s a dove.

A “dove” is inclined to cut rates and is into easy monetary policy.

A “hawk” is inclined to hike rates and is into dispelling inflation altogether.

According to Nick “Nikileaks” Timiraos of The Wall Street Journal:

She had become one of the Fed’s most persuasive policy “doves,” officials who think high inflation is likely to slow as lingering effects of the pandemic reverse and who want to minimize potential job losses. By contrast, the central bank’s “hawks” more readily embrace stiffer measures to curb inflation.

At the margins, Ms. Brainard’s Fed exit raises the risk of a recession because it could lead the central bank to raise rates more aggressively this spring, said Derek Tang, an economist at the forecasting firm LH Meyer.

On the face of it, it should be an absurd thing to write.

One member of the FOMC leaving raises the risk of a recession. Really?

But Timiraos has a point that Brainard’s leaving could tip the balance in favor of Chairman Pow’s hawks.

That is, we could see the Fed hike higher for longer, which, all else being equal, is bearish for the stock market.

So why would Brainard leave?

What’s the National Economic Council?

From whitehouse.gov:

The National Economic Council (NEC) was established in 1993 to advise the President on U.S. and global economic policy. It is part of the Executive Office of the President. By Executive Order, the NEC has four key functions:

• to coordinate policymaking for domestic and international economic issues.
• to give economic policy advice to the President.
• to ensure that policy decisions and programs are consistent with the President’s economic goals.
• and to monitor the implementation of the President’s economic policy agenda.

Working with many department and agency heads within the administration, the NEC Director coordinates and implements the President’s economic policy objectives.

The Director is supported by a staff of policy experts in various fields, including: infrastructure, manufacturing, research and development, small business, financial regulation, housing, technology and innovation, and fiscal policy.

This looks to me like she knew she wouldn’t get Powell’s job, so she went for one where she’s a quasi-member of the cabinet.

At a youthful 61, Brainard has plenty of time to try again. She looks like she could play Buffy the Vampire Slayer compared to the ancient ghouls roaming the streets of DC.

Wrap Up

I look forward to the day I stop caring about the Fed.

But that’s a long way off.

For now, who operates the controls matters.

And with Brainard gone, Powell can return to his most hawkish self.

All the best,

Sean Ring