It’s football season again, so I’m going to describe Fed Chair Powell’s dilemma in a football analogy. I beg your indulgence. Let’s take the snap and go.
A weary, but venerable and still potent, QB (Powell) stepped off the field into halftime (FED Jackson Hole retreat) bruised by criticism and politics but still thinking he was way ahead in the game. In fact, he probably believed his last game was perfect so far in that he was quarterbacking the near-perfect soft landing.
But before he could meet with his team of governors under the protection of the mighty Tetons, the game officials (Bureau of Labor Statistics and the Commerce Dept) rush in and inform him the game is much closer than he thought, and he may in fact be losing. Economic growth was anemic in the first half and practically all the good jobs he thought he helped create were ‘revised’ away and some cyclical industries- like residential construction and heavy manufacturing were cracking.
He’s pissed. How could the scoreboard be so broken in this his last game. Which scoreboard is right? The government statistics board or the stock market at all-time highs. He’s always played it by the numbers (which set of numbers tends to shift each meeting) – he is a “data dependent” QB. Here he was thinking he could punt a few times and maybe throw a short pass (25bp cut) or two and play out the game clock (May ’26). Not happening – it’s game back on for Powell.
As he studies the playbook for the second half, he realizes a lot has changed in the last six months. He has a new coach (Bessent at Treasury) and a new General Manager (President Trump). And they are Monday-morning quarterbacking him like never before. They are talking up the shiny new rookies just waiting to take his slot while criticizing every play he calls and even how he forms the huddle. Talking about the huddle, one of his teammates just walked off the field inexplicably (Governor Kugler) taking early retirement and two others (Waller and Bowman) are openly disdainful of his play calling. That’s never happened to him before.
Then he looks at the playbook and sees his coach and GM have inserted three new plays he knows little about:
- The fiscal dominance play. In this play, the federal government takes an out-of-control budget deficit and makes even larger with a new big deficit expanding bill. Doesn’t this mean more inflation? Doesn’t he have to guard against this? Has this ever worked?
- The tariff play. This play involves a significant tax on imports. Sounds to him like a stagflation play – higher prices and lower growth. He asks the old timers if they have seen this play. Some mumble that a guy named McKinley tried it in 1890. What good does that do him? The FED wasn’t around then, and the zipper had yet to be invented!
- What’s this massive deportation play? Reduce the labor supply dramatically- sounds inflationary?
Finally, he can’t ignore the economic cycle which is the usual defense all FED QBs go up against. If he waits too long in the pocket, and doesn’t cut interest rates, he could be sacked by a recession. He has scrupulously avoided the sack before, but it might be his biggest risk now. Maybe he should just throw the long bomb and lower rates aggressively like he did in COVID. That led to a slew of interceptions (inflation) and took a while for him to regain his standing.
He can’t help but drift a bit and think of his legacy as he is so close to calling it quits. Will he go out compared to his hero and GOAT – Paul Volker – the slayer of inflation and progenitor of the amazing ‘80s economy. Or will he get lumped in with Arthur Burns, abettor of the ‘70’s inflation debacle, and be denied Hall of Fame entry. Perhaps he should not come out of the locker room at all for the final half because ultimately, in sports and politics, he knows all too well that the managers and coaches get their own people on the field eventually.
We feel for Powell but have stakes on this game. For now, our bet is Powell starts throwing the bomb and lowers rates aggressively. We have seen this QB before. In 2019, after talking and acting ‘tough’ for a year he pivoted back to money printing on the first signs of stress. And again in early 2022, the FED was still printing money long after inflation turned markedly upward and had discredited the amateurish play then known as Modern Monetary Theory. We expect him to go out cutting and where this football analogy really fails is that this game never ends and the inflation his cutting will fuel falls onto the next QB.
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