Taps Coogan – March 7th, 2021

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For the last few weeks, we’ve been trying to describe the shift that has occurred in the market’s interpretation of monetary policy. Namely, that the monetary policy regime initiated by the Fed in the aftermath of the Global Financial Crisis has started to break down.

Bleakley Advisor Group CIO Peter Boockvar recently spoke with CNBC and highlighted the dynamic:

 

Mr. Boockvar:

“What we’ve seen… with Powell for the last couple weeks is that the more dovish he has sounded, the higher long rates have gone… When inflation is low, the Fed can do whatever they want without any long term rate implications. When the market believes that inflation is rising, that inflation could potentially be an issue, and you have a Fed that is completely dovish, the bond market is going to tighten for them. The bond market is not going to wait around for Jay Powell to raise short term interest rates. They’re going to do it for him and that’s what we’re seeing now…”

“On paper, it sounds like one lane to go down (is to) just inflate your way out of (all the debt). But in reality, that assumes that interest rates remain equal. But they’re not. Interest rates are not just going to sit around and let the inflation get to the point where it is inflating away the debt. There is going to be a violent move higher in interest rates. That’s the problem… The Fed is left with a very uncomfortable situation… The more dovish they sound, the more the bond market is going to tighten for them as long as the bond market sees these inflation pressures intensifying.” 

“Counter intuitively, the Fed is going to have to sound less dovish if they want to get back control of the bond market.”

The devil’s bargain that the Fed made in the wake of the Global Financial Crisis was that they could blow as many liquidity fueled asset bubbles as they wanted until the market started to worry about inflation. 

The Fed can say that they don’t care about ‘transient’ overshoots in inflation expectations until the cows come home. The market clearly cares and that’s all that really matters. 

This would be a great time for the hawkish members of the FOMC board to explain to their post-modern colleagues what all of this means. Too bad there aren’t any real hawks left.