The Financial Stability Oversight Council has identified the rise of AI as a “vulnerability” challenging the stability of the U.S. economy, according to the Financial Times. Still, the tech is an “emerging threat,” according to Secretary of the Treasury Janet Yellen, who chairs the Council. Yellen added that she believes existing regulations will be sufficient to combat any potential threat posed by AI.

Researchers from OpenAI’s “Superalignment” research team have introduced a possible way “to let an inferior AI model guide the behavior of a much smarter one without making it less smart,” mitigating the risk of the smarter AI going rogue, according to Wired. The process, referred to as supervision, could serve as a safeguard during future AI research.

In a new interview with the Associated Press, Amazon Web Services CEO and key player in the company’s AI strategy Adam Selipsky discusses that strategy and articulates a vision for generative AI that utilizes “three different layers”: infrastructure, large language models, and the consumer-facing applications that utilize AI to deliver services.

For The Legal Intelligencer, general counsel for Datasite LLC Patricia Ellis argues that the M&A sector is particularly well-suited to adopting AI. Ellis suggests several portions of the dealmaking process that may benefit the most from adopting AI into the workflow, especially those that require the completion of repetitive and time-consuming tasks.

Ethan Beberness is a Brooklyn-based writer covering legal tech, small law firms, and in-house counsel for Above the Law. His coverage of legal happenings and the legal services industry has appeared in Law360, Bushwick Daily, and elsewhere.

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In any event, things are bad enough for Janet Yellen to step away from defending her efforts to save the global economy before the same Republicans who tried to destroy it and the erotic financial thriller she’s writing to remind everyone that “decoupling would be a big mistake.”

Americans “benefit greatly” from buying goods that are cheaper to produce in China, she added. China equally benefits from US exports that also bolster the US economy.

That’s why, she stressed, it would be “disastrous” to cease trading with China. “De-risk? Yes. Decouple? Absolutely not,” Yellen said, echoing the joint statement leaders from the Group of Seven (G7) made at last month’s summit in Japan.

Anyway, Wall Street hasn’t gotten the message.

Goldman Sachs Group has given up several mandates for IPOs in Hong Kong this year, including deals for a dermatology company and an online marketplace for pharmaceutical products, according to filings with the city’s stock exchange. Bank of America has left its role in the coming IPO of Growatt Technology, which makes inverters for solar panels.

Banks seldom relinquish IPO mandates after receiving them. The moves reflect how difficult the market is for Chinese companies that want to go public on international stock exchanges…. “If companies felt there was a lot of growth left, they wouldn’t be doing this,” [Man GLG head of equities for Asia ex-Japan Andrew] Swan said. “It’s a sign of the times in that the way they create shareholder value now is to restructure.”

American Investment Banks Give Up Some China IPO Mandates [WSJ]
Yellen on US-China trade: ‘Decoupling would be a big mistake’ [CNN]
GOP grills Yellen over ‘X-date’ in first hearing since debt ceiling deal [The Hill]
US plays down chance of breakthrough from Blinken China visit after tense call [Reuters]

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It didn’t have to be this way. You see, Janet Yellen hasn’t been thinking about the debt limit for five months. She’s been worrying over it for at least a dozen years. And she had a plan in hand to finally get it off her mind for good.

“I always worry about the debt ceiling,” Ms. Yellen told The New York Times in an interview on her flight from New Delhi to Bali, Indonesia [in November 2022], in which she urged Democrats to use their remaining time in control of Washington to lift the debt limit beyond the 2024 elections. “Any way that Congress can find to get it done, I’m all for.”

Of course, she was ignored then as she is ignored now. Oh, but what could have been! Being Treasury Secretary or its equivalent in a normal, responsible rich country must be so easy, must leave so much time for hiking and tennis and other extracurricular pursuits. Why, even in countries not-so-normal-but-not-quite-as-dysfunctional-as-ours, her counterparts have time enough to themselves in between raising retirement ages and dealing with the catastrophic fallout therefrom. Oh, just consider what might have been were Yellen granted the free time necessary to put her pen to something other than a ledger book grimly chronicling the United States running out of money.

Several explicit sex scenes in the new book by [Bruno] Le Maire, the French finance minister, have given the book a flush of attention and forced the government of President Emmanuel Macron to explain how one of its most senior members has time to write novels when people are struggling with high food and energy prices…. Creative writing is an essential escape that for decades has been as much a part of him as his day job setting deficit targets and passing stimulus packages.

“It’s a very deep, inner necessity that gives me balance,” Le Maire said in an interview. “I’m just trying to be 100% myself.”

Now, we don’t know where, precisely, Yellen’s erotic tastes run. But she’s a Bay Ridge girl and has lived in Berkeley, on and off, for the last 43 years, so surely she could do better than this:

“She wrapped one leg around my waist, clutched her other leg to my ankle and tilted her head back,” Le Maire writes in a passage that quickly takes a turn to language not fit for a family publication.

On page 74, Julia, one of the novel’s main characters, peels off her shirt and throws herself on the bed in front of the protagonist. The prose veers into ribald and almost clinical terminology, landing somewhere between erotica and shoptalk at a proctologists’ convention….

“French people can forgive a politician for writing erotic novels, but they can’t forgive a politician for writing them badly,” said Alexandre Gefen, a literary critic and research professor for CNRS, France’s national research organization.

Yellen’s Debt Limit Warnings Went Unheeded, Leaving Her to Face Fallout [NYT]
Racy Novel by France’s Finance Minister Has Even the French Blushing [WSJ]
Debt-Ceiling Bill Faces Test as Some GOP Critics Vent [WSJ]
$38.8 Billion in U.S. Treasury? For These Billionaires, That’s Nothing. [NYT via Yahoo!]

For more of the latest in litigation, regulation, deals and financial services trends, sign up for Finance Docket, a partnership between Breaking Media publications Above the Law and Dealbreaker.

That is kind of what you think of when you hear the phrase “bank run.” It seems like something from the deep past, something our ancestors had to worry about long before the days of FDIC insurance.

As Silicon Valley Bank depositors recently proved, we’re not so different from our forebears. A modern-day bank run swiftly ended the 40-year history of Silicon Valley Bank, with regulators swooping in to seize its deposits on March 10.

Late on March 8, Silicon Valley Bank disclosed to investors that it was short on capital. The bank was selling off bonds at a loss, and said it needed to raise $2.25 billion. Reportedly, fearing a bank run, certain members of the venture capital community then told their portfolio managers to move funds — funds Silicon Valley Bank didn’t necessarily have if the withdrawals came all at once. These communications, which spread to social media, perhaps not so surprisingly, caused a bank run.

On March 9, customers pulled more than $42 billion from their accounts. That’s “billion” with a “b,” over the course of a single day. In comparison, the 2008 bank run that led to the failure of Washington Mutual took place over 10 days and involved only $16.7 billion worth of withdrawals. Silicon Valley Bank ended the day with a negative cash balance of $958 million.

Silicon Valley Bank had long been a favorite of tech startups. Since its customers were overwhelmingly corporations with more than $250,000 in their accounts, very few of Silicon Valley Bank’s deposits were FDIC insured.

However, federal officials were apparently working over the weekend, and late on Sunday, March 12, Federal Reserve Chair Jerome Powell, U.S. Treasury Secretary Janet Yellen, and FDIC Chair Martin Gruenberg released a joint statement saying that all Silicon Valley Bank depositors will be made whole anyway. Officials promised that this will not lead to losses for U.S. taxpayers.

Banking regulators also indicated that Signature Bank depositors would be made whole. You may have noticed that New York-based Signature Bank also just failed. This institution was notable for having almost a quarter of its deposits come from the cryptocurrency sector as of the not-too-distant past.

The feds have been very careful not to call these bailouts, and to emphasize that no costs will be borne by taxpayers. Officials say their aim is to bolster public confidence in the U.S. banking system.

They will have a tough row to hoe there. I think the nuance as to whether this is or is not a bailout is going to be lost on a lot of people. Plus, in most parts of the country, it would be hard to find less sympathetic depositors than tech companies in Silicon Valley and those relying on a New York-based crypto industry bank. Talk about a public relations nightmare.

People are going to look at where these two bank failures happened, and make some assumptions. In this day and age, it’s pretty easy to imagine some conspiracy theory floating around on TikTok about Bank of America or whatever causing everyday average Americans to run out and pull their deposits. That isn’t what happened though. Normal Americans are going to wonder why they can manage not to cause their banks to collapse when apparently Silicon Valley cannot.

Unfortunately, Silicon Valley Bank didn’t have Stephen Root to jump up on the counter with a shotgun and prevent this whole mess. What’s left of the bank will probably find a buyer and everything will be more or less fine (unless you’re a Silicon Valley Bank equity investor or bondholder, in which case you will be losing a lot of money). Still, it has to mean something that the first financial institutions to succumb to panic stemming from rising interest rates were a tech industry bank and a crypto industry bank. It’s going to leave a lot of Middle Americans shaking their heads.

Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.

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With the Oversight gavel in hand, Kentucky Republican Rep. James Comer has announced his plan to dedicate himself with monastic devotion to probing the lab leak theory of coronavirus origination, the border crisis, and, most importantly, the supposed crimes committed by President Biden and his family.

What crimes might those be? Rep. Comer will be be happy to tell you:

Committee Republicans have uncovered evidence of federal crimes committed by, and to the benefit of, members of the president’s family. These include conspiracy or defrauding the united states, wire fraud, conspiracy to commit wire fraud, violation of the Foreign Agents Registration Act, violations of the Foreign Corrupt Practices Act, violations of the Trafficking Victims Protections Act, tax evasion, money laundering, and conspiracy to commit money laundering. The Biden Family’s business dealings implicate a wide range of criminality from human trafficking to potential violations of the Constitution.

Interesting! Because yesterday, the Trump Organization’s CEO was sentenced to five (piddling) months at Rikers thanks to a years-long tax avoidance scam, and the former president and his three adult children are all facing fraud charges in New York. But not a single member of Biden’s family, much less the president himself, has faced any charges. And not for lack of investigation, either.

When Bill Barr controlled the Justice Department, he not only established an intake mechanism for Rudy Giuliani’s book reports on Joe Biden’s supposed ties to Ukraine, but he tasked a US Attorney in Delaware with investigating Hunter Biden and his much-hyped laptop. And yet, no charges were forthcoming. Which kinda suggest that there’s no there there. Hunter Biden is a screwup who traded on his family name, as did his uncle James Biden, in ways that are both unseemly and entirely legal — not to mention bog standard in DC? See also, Ginni Thomas, who sits at the middle of a network of conservative lobbyists despite being an absolute Froot Loop.

OR MAYBE THEY NEVER GOT INDICTED BECAUSE THE DEEP STATE IS IN ON IT!

In any event, Rep. Comer intends to find out — or at least to use his megaphone to make a lot of implications, even if proof of wrongdoing remains elusive. Yesterday, he sent a letter to Treasury Secretary Janet Yellin demanding Suspicious Activity Reports relating to several members of the president’s family, as well as their business ventures and associates, plus any information which might prove that the Biden administration suppressed it. Hey, remember five minutes ago when Republicans claimed there was no legitimate legislative purpose for the Ways and Means Committee to see Trump’s tax returns? LOL!

They’re also demanding that the White House Counsel and National Archives turn over information regarding the ongoing investigation into the handful of classified documents recently discovered at the Penn-Biden center

But mostly what they care about is Hunter Biden’s penis, and the travesty of Twitter supposedly censoring information about it. Toward that end, they’re planning a public hearing on February 6, at which they intend to interrogate multiple former Twitter officials about their “role in suppressing Americans’ access to information about the Biden family on Twitter shortly before the 2020 election.” They want former chief legal officer Vijaya Gadde, former general counsel James Baker, and former trust and safety head Yoel Roth to show up to get yelled at, despite the fact that the FEC already investigated and found that Twitter broke no laws in the handling of the laptop story because, as a private company, it can choose to publish or not publish anything it likes.

Comer has not demanded a public hearing with Steve Bannon, or dissident Chinese billionaire Guo Wengui, who appear to have deliberately injected this story into the media ecosystem in ways that made it impossible to verify the authenticity of the information on the supposed “laptop from hell,” causing every media outlet but the New York Post to pass on the story.

These next two years are going to be so unspeakably stupid. And we are all about to become intimately acquainted with every freckle and mole on Hunter Biden’s rear end — figuratively, and also literally. Party of family values, FTW.

Liz Dye lives in Baltimore where she writes about law and politics.

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Many commentators consider two consecutive quarters of negative GDP growth a recession. But it turns out that at a granular level no one really agrees on what exactly makes a recession different from economic normalcy.

The National Bureau of Economic Research is the official determiner of whether or not we’re in a recession. Eight NBER economists get together, look at a lot of data (including but certainly not limited to GDP patterns), and decide if we’re in a recession.

This organization may be nonprofit and nonpartisan, and surely utilizes highly trained experts. Yet, at the end of the day, it’s just eight people considering whether or not they feel like we’re in a recession.

That’s almost as arbitrary at nine former lawyers feeling their way through whether 330 million of the rest of us should have access to abortion (or guns, or democracy).

Biden administration officials sure don’t think we’re in a recession yet. “When you’re creating almost 400,000 jobs a month, that is not a recession,” Treasury Secretary Janet Yellen said during her recent appearance on NBC’s Meet the Press.

There’s a lot more than just sustained, robust job growth to demonstrate the ongoing strength of the U.S. economy.

Median wages continue to climb steadily upward, especially for younger workers and workers willing to switch jobs for higher pay. Inflation has blunted some of those wage gains for some workers, but real wage gains have easily trumped inflation for a good number of workers.

Now Congress is finally getting on board (along with the Fed) in at least attempting to implement policy measures to help curb inflation. Corporate profits remain strong, with about 78 percent of earnings reports beating Wall Street expectation — well above the long-term average.

“Being in a recession” seems to be used colloquially as shorthand for “many more people than normal feeling a lot of economic pain.” Charactered that way, if we are in a recession, it’s a highly technical distinction.

If we are in a recession — one where there are nearly two job openings for every person looking for work, where wages are rising rapidly, and where corporate profits remain high — who really cares?

The two-quarter decline in GDP may actually indicate that the Fed’s plan is working. The Federal Reserve has been waging an aggressive war against inflation this year, raising its benchmark interest rate four times so far for a total of 2.25 percentage points. At least a couple more rate hikes are seen as likely before year’s end. The whole idea of these rate increases is to slow the economy, and the decline in GDP shows they are kicking in.

In an ideal world, of course, the Fed could still achieve its aspirational soft landing: reigning in inflation without plunging the U.S. into a severe recession. Despite a lot of anxiety, and a lot of criticism, it seems the Fed is doing exactly what it’s supposed to be doing. Americans’ top concern right now is not employment, the business climate, or GDP. It’s inflation, which is exactly what the Fed’s rate hikes are targeting.

Interest rate hikes are meant to sacrifice things like job growth and GDP in the name of fighting inflation. At this point, people are still complaining about inflation and are not particularly worried about ample employment opportunities or esoteric economic indicators. Which means that the Fed hasn’t irreparably damaged the broader economy, and that whether eight economists think we in a recession is not highly useful information at the moment.

Jonathan Wolf is a civil litigator and author of Your Debt-Free JD (affiliate link). He has taught legal writing, written for a wide variety of publications, and made it both his business and his pleasure to be financially and scientifically literate. Any views he expresses are probably pure gold, but are nonetheless solely his own and should not be attributed to any organization with which he is affiliated. He wouldn’t want to share the credit anyway. He can be reached at jon_wolf@hotmail.com.

Well, 2021 has passed, and neither the revelation not the new bills have seen the light of day. But now that President Joe Biden has gotten around to taking a break from not making decisions to actually appoint a treasurer—a historic one, as well, albeit one that could presumably have come less than 17 months into his presidency—Yellen’s husband, George Akerlof, will find out if seeing his wife’s name on a C-note has the same effect on his nethers as it did on Linton’s.

While Ms. Yellen sat for her official currency signing more than a year ago, her name could not appear on the greenback until a U.S. treasurer was in place. Under arcane rules, both signatures must be added to new series of currency in tandem…. Ms. Yellen’s name likely won’t appear on any bills for several weeks. A representative for Treasury said that while she provided her signature to the Bureau of Engraving and Printing on March 10, 2021, it can take up to four to five months to update printing plates for each denomination.

Yellen may soon get her name on the greenback. [NYT]
Biden to appoint first Native American treasurer of the United States [CNN]
Biden’s Long Deliberations Over Some Key Policy Decisions Frustrate Democrats [WSJ]

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The senator had asked for a response by Oct. 15 on plans for a trading ban, followed by its implementation within 60 days of her letters….. St. Louis Fed President James Bullard wrote to Ms. Warren on Sept. 20 on behalf of all the regional Fed bank leaders, saying that a broader central bank review of its internal ethics code, announced the same day as Ms. Warren’s letters, would drive any changes the Fed makes.

What’s taking so long? Well, uh, Powell may have had a few other things to square away before implementing any kind of restriction.

Federal Reserve Chairman Jerome Powell sold between $1 million and $5 million worth of stock from his personal account on October 1, 2020, according to disclosure forms reviewed by the Prospect. Powell’s sale of shares from a Vanguard Total Stock Market Index Fund has not been previously reported. This sale occurred right before the Dow Jones Industrial Average suffered a significant drop.

That’s not a great look, and it doesn’t get any better the more you learn about it.

Meeting logs show that Powell had been in contact with Treasury Secretary Steven Mnuchin four times on October 1. Powell had been pressing the administration to support more fiscal stimulus, so that the sole responsibility for rescuing the economy would not be on the Fed and monetary policy…. That same day, at 2:48 p.m., after conferring with Mnuchin, Trump tweeted that he had instructed his representatives to halt negotiations with Democrats on a pandemic stimulus package until after the election: “Immediately after I win, we will pass a major stimulus bill.”

All of a sudden, the seemingly growing likelihood that Powell would get four more years seems somewhat fainter possibility, regardless of the position of his predecessor. Indeed, it’s looking so bad that Senate Republicans are offering that rarest of things: A helping hand to President Joe Biden.

GOP senators, in part driven by concern that a Powell replacement would be more liberal, are making it clear they will help put up the voters to confirm him to a second term…. “The reason I would support him — it isn’t because I agree with the way he’s handled the inflation issue,” [Sen. Charles] Grassley said, “but the alternative would be much worse.”

Maybe Biden should offer a Powell renomination in exchange for a permanent suspension of the debt ceiling.

Treasury Secretary Janet Yellen on Monday said the debt-limit deal enacted by Congress last week will allow the government to keep paying its bills through Dec. 3…. “It is imperative that Congress act to increase or suspend the debt limit in a way that provides longer-term certainty that the government will satisfy all its obligations,” she wrote.

Jerome Powell Sold More Than a Million Dollars of Stock as the Market Was Tanking [The American Prospect]
Elizabeth Warren Doesn’t Get Fed Trading Ban Proposal by Oct. 15 as Requested [WSJ]
Senate GOP signals they'll help bail out Biden's Fed chair [The Hill]
Yellen Says Debt-Limit Deal Will Keep Government Funded Through Dec. 3 [WSJ]

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The Senate’s nonpartisan parliamentarian Monday ruled in favor of a Democratic effort to pass additional legislation through a process called reconciliation…. The ruling will give Democrats more room to maneuver to pass President Biden’s agenda, including his recently announced $2.3 trillion infrastructure plan.

And that means something else is on: Serious tax planning.

President Biden last week outlined a $2 trillion infrastructure plan to be funded in part by raising the corporate rate to 28% from 21% and hiking the minimum tax on U.S. companies’ foreign profits. The plan would also make it tougher for foreign-owned businesses with U.S. operations to benefit from moving their profits to low-tax countries…..

FM Global, a Johnston, R.I.-based mutual insurance company, is considering deferring a tax incentive known as bonus depreciation…. By deferring bonus depreciation and other incentives, FM Global can take deductions in future years when tax rates could be higher…. Companies won’t know until later which of the proposals actually comes to fruition. In many cases, they have already modeled Mr. Biden’s plan and are making investments based on forecasts they have adjusted for potential related risks, said John Gimigliano, head of tax legislative services at professional-services firm KPMG.

And if they get too cute, Janet Yellen has some plans of her own.

Citing a “30-year race to the bottom” in which countries have slashed corporate tax rates in an effort to attract multinational businesses, Yellen said the Biden administration would work with other advanced economies in the Group of 20 to set a minimum…. “It is important to work with other countries to end the pressures of tax competition and corporate tax base erosion,” Yellen said.

And, hey, since we’re raising taxes, and since Andrew Cuomo is too weak to stop it anymore....

[New York] Legislators were briefed on a plan under which income-tax rates would rise to 9.65% from 8.82% for single filers reporting more than $1 million of income and joint filers reporting more than $2 million, the people said.

The plan would also add two new tax brackets. Income over $5 million would be taxed at 10.3% and income over $25 million would be taxed at 10.9%, the people said of the plan, and the new rates would expire in 2027…. The budget would also increase New York’s corporate franchise tax to 7.25% from 6.5% through 2023, the people said.

But look: It’s not all bad. There’s no stock-transfer tax, and neither of these, either.

Previous legislative proposals to increase the estate tax and enact a 1% surcharge on capital gains aren’t part of the emerging budget deal, the people said.

Senate Parliamentarian Rules in Favor of Democratic Reconciliation Effort [WSJ]
Companies Speed Up Tax Analysis in Response to Biden Infrastructure Plan [WSJ]
Yellen calls for minimum global corporate income tax [AP]
New York Lawmakers Near Budget Deal to Raise Income, Corporate Taxes by $4.3 Billion [WSJ]

It’s like a modified pump and dump, because at the end of the day it will most certainly go back down.

This guy thinks so, too.

“If they are all egging each other on using a social-media platform, they are effectively engaged in a crowdsourced pump-and-dump scheme,” said Daniel Hawke, a partner at Arnold & Porter Kaye Scholer LLP.

The traders “are making no effort to conceal their apparent intent to manipulate the price of the stock,” added Mr. Hawke, a former chief of the Securities and Exchange Commission’s market abuse unit.

As Belfort’s nearly two years in prison will tell you, pump-and-dumps are illegal. So are 4.4 million Redditors about to go to jail? Uh, probably not.

“Our team is of course -- our economic team including Secretary Yellen and others -- are monitoring the situation,” [White House Press Secretary Jen] Psaki told reporters at the White House on Wednesday.

The SEC said late Wednesday that it is monitoring the “volatility in the options and equities markets” and “working with our fellow regulators to assess the situation….” Suing hundreds of defendants who likely traded in small increments probably isn’t practical for the agency, according to securities lawyers, while a case that alleged a few key individuals instigated any problematic trading could be feasible….

Some investors, though, said the trading talked about in Reddit’s WallStreetBets forum isn’t manipulative and reflects an earnest effort by individual investors to seize on opportunities that have always been available to establishment players…. “This is the ultimate triumph of the newbies over the old pros,” said Steve Sosnick, chief strategist at Interactive Brokers. “But what’s frustrating to the old pros is that they can’t engage in the sort of behavior that the newbies can do.”

Pity, because it doesn’t look like they’ll be getting any help from Congress.

“For years, the same hedge funds, private equity firms, and wealthy investors dismayed by the GameStop trades have treated the stock market like their own personal casino while everyone else pays the price,” [Sen. Elizabeth] Warren said.

“Gotta admit it’s really something to see Wall Streeters with a long history of treating our economy as a casino complain about a message board of posters also treating the market as a casino,” [Rep. Alexandria Ocasio-Cortez] tweeted…. “AOC got our backs,” read a post on the forum, along with a screenshot of Ocasio-Cortez’s Twitter thread.

[Tucker] Carlson then slammed the Wall Street establishment for crying foul on a game insiders are usually the ones playing. "That's a crime only people who work for hedge funds are allowed to manipulate the market often with the help of CNBC. Normal people are not allowed to do that already. The people in charge of our system are outraged that anyone without an official position at a hedge fund would dare manipulate the market to their benefit."

Well, those are some delightfully strange bedfellows, but if the powers that be aren’t going to do what the hedge funds pay them to do, someone else will, it seems.

TD Ameritrade said it placed restrictions on certain types of trading activity on the companies “in the interest of mitigating risk for our company and clients….” Charles Schwab said shares of GameStop could no longer be traded on margin, meaning trades cannot be placed with money borrowed from the company. And Robinhood, the trading app that has made it easier for inexperienced traders to enter the market, said it wouldn’t allow margin trading of shares of both GameStop and AMC.

GameStop Stock Surge Tests Scope of SEC’s Manipulation Rules [WSJ]
SEC ‘Monitoring’ GameStop Frenzy as Warren Pressures Regulators [Bloomberg]
Trading platforms are limiting trades of GameStop and other companies. [NYT]
AOC mocks Wall Street outrage over GameStop surge [N.Y. Post]
Progressives Slam Hedge Funds Irked By GameStop Stock Boom As SEC Says It’s Monitoring The Situation [Forbes]
Tucker slams hedge funds as he explains GameStop stock market saga [The Post Millennial]
Jordan Belfort: GameStop frenzy is a ‘modified pump and dump’ [CNN]

A real estate salesman in Valparaiso, Ind. A former line cook from the Bronx. An evangelical pastor and his wife in Huntington Beach, Calif. A high school student in the Milwaukee suburbs.

Meanwhile, “Wall Street is losing its mind” and Steve Cohen is losing a whole lot of money and a whole slew of other seeming hopeless companies are seeing their share prices rocket hundreds of percent. At this point in the Great GameStop Game—after it looked briefly like the professionals had taken back control, only to see r/WallStreetBets’ degenerates retake the offensive—it seems fair to ask, “What the hell is going on?” And everyone is.

It is tempting to see GameStop as merely clownish behavior in a chat room having some amusing effects on a stock few care about. That would be a mistake…. GameStop’s soaring stock—and similar moves in BlackBerry, Nokia and others—is a bubble in microcosm, with lessons for those of us worrying about froth elsewhere in the market…. The absence of emotional stability on r/WSB is obvious and has worked out beautifully for buyers of GameStop so far. But when the stock is weighed, many will be found wanting, as they always are in bubbles.

If your theory of GameStop’s stock is that it is a market plaything utterly disconnected from any fundamental information about GameStop the company, a way “to use easter eggs in the mechanical infrastructure of the market to make money,” a pure token for YOLO gambling—that doesn’t have to just mean Reddit gambling…. Surely a lot of professional investors are white-knuckling this thing, buying it as a trade and hoping they can get out before the redditors do…. WallStreetBets started this but anyone can jump in now.

Judging by volumes, everyone has. Yesterday Bloomberg’s Eric Balchunas pointed out that GameStop was “the most traded equity on the planet,” with $20 billion of volume. Tesla was No. 2. GameStop closed yesterday at $147.98, for a market capitalization of about $10 billion, up 93% from the day before, up 641% from two weeks ago. That was before Musk tweeted.

Also, it can’t just be r/WallStreetBets, because, well, you know….

A message on the forum’s landing page initially said WallStreetBets had been taken private by its moderators because of technical difficulties on an “unprecedented scale as a result of the newfound interest in WSB.”/About an hour later, the forum was made available to the public again….

Separately, chat service Discord banned WallStreetBets’ server late Wednesday…. A Discord spokeswoman said the WallStreetBets server had been on the platform’s radar for some time “due to the occasional content” that violates community guidelines, including “hate speech, glorifying violence, and spreading misinformation.”

TD Ameritrade said it placed restrictions on certain types of trading activity on the companies “in the interest of mitigating risk for our company and clients….” Charles Schwab said shares of GameStop could no longer be traded on margin, meaning trades cannot be placed with money borrowed from the company. And Robinhood, the trading app that has made it easier for inexperienced traders to enter the market, said it wouldn’t allow margin trading of shares of both GameStop and AMC.

Anyway, back to the broader whys and hows and wherefores.

The frenzy of activity is stirring regulatory and legal concerns, as well as the attention of the Biden administration. The White House press secretary said on Wednesday that its economic team, including Treasury Secretary Janet Yellen, is monitoring the situation.

The newbie investors are gathering on platforms such as Reddit, Discord, Facebook and Twitter. They are encouraging each other to pile into stocks, bragging about their gains and, at times, intentionally banding together to intensify losses among professional traders, who protest that social-media hordes are conspiring to move stock prices….

“I think the big takeaway is, fundamentals do not apply to retail traders,” said [Noah] Williams. “It’s all about sentiment. The only reason why Tesla is worth what it is is because people believe in that company.”

What an apt comparison, Noah. How is the original GameStop doing?

Tesla Inc. reported fourth quarter sales of $10.7 billion and earnings of 24 cents a share on Wednesday, its fifth straight quarter of profits…. The stock changed hands at 1,371 times trailing earnings as of Wednesday. Even that cartoonishly large multiple provides false comfort: In the fourth quarter, Tesla earned $270 million in net income but sold $401 million in regulatory credits to other auto makers needing to meet emissions mandates, primarily in Europe. Before tax, those revenues carry 100% profit margins. Tesla’s credit sales have significantly outpaced net income for five consecutive quarters, and those credits might become less valuable over time, as more manufacturers step up electric car production.

But, seriously: What the fuck is going on? As befits what historians will no doubt refer to as the “Long 2020,” everything and nothing and who the hell knows? Certainly, not the people who inadvertently helped make it happen, whatever it is.

The traders’ motivations vary widely. Some reason that GameStop’s shares are a good value. Others are just riding the wave. And others want to squeeze Melvin Capital, a hedge fund that was shorting GameStop. They’re the ones quoting Heath Ledger’s Joker character from “The Dark Knight”: “It’s not about money; it’s about sending a message.”

But the aggressive maneuvers against the shorts aren’t necessarily limited to the amateurs. Wall Street’s big players know a good opportunity when they see it.

“It’s a little like watching one of those horror films where you can see the bad guy slowly going up the stairs,” [r/WallStreetBets creator] Jaime Rogozinski said. “You see this train wreck happening in real time….”

When an online mob goes after an investor’s kids or spouse—that crosses the line, he said.

“It’s no longer what it used to be,” he said.

GameStop Mania Reveals Power Shift on Wall Street—and the Pros Are Reeling [WSJ]
‘Dumb Money’ Is on GameStop, and It’s Beating Wall Street at Its Own Game [NYT]
GameStop Is a Bubble in Its Purest Form [WSJ]
GameStonk Rocket Rocket Rocket [Matt/Bloomberg]
Tesla’s Stock Is the Original GameStop [WSJ]
4 Things to Know About the GameStop Insanity [NYT]
Wall Street is ‘losing its mind’ as small investors are ‘taking down the billionaires’: Charles Payne [Fox Business]
AMC’s Pandemic Survival Gets Boost From Trading Mania [WSJ]
Reddit’s WallStreetBets Forum Briefly Goes Dark [WSJ]
Trading platforms are limiting trades of GameStop and other companies. [NYT]
‘This is a drastic shift’ – Reddit founder Alexis Ohanian on WallStreetBets short squeeze [CNBC]
WallStreetBets Founder Reckons With Legacy Amid Stock-Market Frenzy [WSJ]
Mark Cuban says his 11-yearold son ‘made trades’ in AMC, BlackBerry with Reddit’s WallStreetBets: ‘He hasn’t made money yet’ [CNBC]

During Yellen's Tuesday confirmation hearing before the Senate Finance Committee, Sen. Maggie Hassan (D-N.H.) asked Yellen about the use of cryptocurrency by terrorists and other criminals.

"Cryptocurrencies are a particular concern," Yellen responded. "I think many are used—at least in a transactions sense—mainly for illicit financing."

She said she wanted to "examine ways in which we can curtail their use and make sure that [money laundering] doesn't occur through those channels."

And thanks to her predecessor, she’ll have a lot more information with which to do it.

Treasury nominee Yellen is looking to curtail use of cryptocurrency [Ars Technica]

At the outset of the pandemic, a sharp contraction in economic activity led to a temporary drop in pollution and a boost to air quality. Some national news outlets clung to the feel-good narrative, even indulging in fake stories about dolphins returning to the canals of Venice.

While the pandemic-related drop in pollution was (by and large) temporary, a more structural reduction is coming by way of economics: The cost of polluting in the European Union is near an all-time high.

What’s The Story?
The EU Emissions Trading System (EU ETS) was established 15 years ago as part of the “cap and trade” program to curb carbon emissions. The system allows companies to trade carbon credits (called "allowances") which represent the right to release one ton of carbon into the atmosphere.

How It Works: Certain industries are allocated free carbon credits each year (airlines, utilities, etc.), while other credits are bought at auction. The system is meant to encourage investment in sustainable innovation, and companies that reduce their emissions can sell their credits on the open market.

As environmental restrictions become more onerous, and the EU allocates fewer free credits over time, the price of carbon allowances has been steadily rising:

• Over the past three years, the price of credits on the EU ETS has more than quadrupled.
• On Friday, the cost of one credit reached a 15-year high of €31.

Who’s Playing? It’s not just coal companies and Ryanair competing for the right to emit. Hedge funds, betting that restrictions will continue to ramp up, are scooping up carbon credits as a “green trade.”

How About In The U.S.?
At present, there are no national carbon trading programs or carbon taxes in the U.S. But that may soon change.

Janet Yellen, President-elect Biden’s Treasury secretary nominee, has vocally supported a carbon tax and was a founding member of the Climate Leadership Council, a bipartisan group of influential economists and business leaders that aims to find a “cost-effective climate policy solution.”

The Takeaway: But a tax on high-emitting industries hasn’t been required to change the energy landscape in the U.S. Coal mining capacity has fallen nearly 30% over the last decade, according to the Energy Information Administration.

President-elect Joe Biden plans to nominate former Federal Reserve Chairwoman Janet Yellen, an economist at the forefront of policy-making for three decades, to become the next Treasury secretary…. In one speech last year to a housing trade group, she warned higher taxes might not be enough to put programs such as Social Security and Medicare on solid footing, warning of painful trade-offs. “This is root canal economics,” she said.

The Cabinet of Fox Business’ phantasmagorical nightmares this ain’t, but Fox can certainly still try to gin up some fear and loathing.

Progressives aligned with Warren have told FOX Business they'd consider it a victory if Yellen were appointed.

Janet Yellen Is Biden’s Pick for Treasury Secretary [WSJ]
If Janet Yellen becomes Treasury Secretary, she would make history again [Fox Business]

....countries that know how to play the game against the U.S. That’s actually why the E.U. was formed....and for China, until now, the U.S. has been “easy pickens.” The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!

— Donald J. Trump (@realDonaldTrump) July 29, 2019

His best attempt at a brave face and vague, empty expressions of approval in him by Congress, this is not likely to make Jay Powell feel particularly confident going into this week’s meeting. And his predecessor isn’t making it any easier on him.

“I think in light of the risks, I would be inclined to cut a bit,” she said, referring to the Fed’s benchmark interest rate. “I wouldn’t see this as the beginning, unless things change, of a major easing cycle. But I do think it’s appropriate.”

Now is not the time to remind our oafish child-president that the guy he picked to not be you—in spite of the fact that said guy was essentially you without an economics Ph.D—is, in fact, you, Janet! Larry Kudlow’s got it hard enough without having to talk his boss off this cliff right now, having so effectively browbeaten Powell into giving Trump at least some of what he wants, only to have the woman who so recently went on the radio to call that boss an idiot say, “Looks good to me!” Not helpful, J-Yellz, unless you’re bored and want to see what happens when a president tries to fire or demote a Fed chair or find some other outlet for Constitutional chaos.

Former Fed Chair Janet Yellen says she’s in favor of an interest rate cut [CNBC]
Trump hits the Fed again, says ‘small rate cut’ this week is not enough [CNBC]
Fed Poised to Cut Rates for First Time Since Financial Crisis, Ending an Era [NYT]

But what Trump didn't anticipate was something that anyone who knows J-Yellz knew already. You can cross Janet Yellen, but homegirl is from Bay Ridge, so you better expect that she'll be back to dog walk your ass once she's ready to throw down...

And that time has come. 

Spin that diss track, Public Radio! 

(In this case, American Public Media’s, Marketplace.)

[Kai] Ryssdal: Do you think the president has a grasp of macroeconomic policy?

Yellen: No, I do not.

UH OH! [AIR HORN SOUND]  

Ryssdal: Tell me more.

Oh, yes, please do...

Yellen: Well, I doubt that he would even be able to say that the Fed's goals are maximum employment and price stability, which is the goals that Congress have assigned to the Fed. He's made comments about the Fed having an exchange rate objective in order to support his trade plans, or possibly targeting the U.S. balance of trade. And, you know, I think comments like that shows a lack of understanding of the impact of the Fed on the economy, and appropriate policy goals.

While we are a little shocked at how raw she got on POTUS, we do think that J-Yellz showed admirable restraint by not commenting on Trump's "tragic-ass weave" or "tiny baby hands."

But once again, you mess with Janet Yellen and you will get attacked on the radio. That's just science.

Ryssdal: This is kind of a shot-in-the-dark question, but what would it take for you to pick up the phone and call Kevin Hassett at the Council of Economic Advisers? Or Larry Kudlow at the National Economic Council, and say “Hey, Lar?”

Yellen: Well, that's something that I have not done since leaving the administration.

Duck and cover, Larry Kudlow. She's on fire!!!

Former Fed Chair Janet Yellen: Far from retired, nowhere near done [Marketplace]

Previous chairs Janet Yellen (2014-18) and Ben Bernanke (2006-14) each received B-pluses. Mr. Greenspan (1987-2006) also earned a B-minus from the economists.

It gets worse.

Asked to grade the performance of each of the past four Fed chairs, economists surveyed this month by The Wall Street Journal assigned an average score of B-minus to Mr. Powell.

On par with Jay Powell! A man illiterate in the Fedspeak of which Greenspan was such a Shakespearean practitioner! A person who spends most of him time bleating limply like this:

Mr. Powell also emphasized the Fed’s “precious” independence from political concerns. He said the Fed needed to maintain the public’s trust by remaining transparent about its activities and accountable to Congress….

“Monetary policy can be a powerful tool” to stabilize economic growth and mitigate economic downturns, Mr. Powell said. “But in truth, its powers are dwarfed by larger forces, such as the productivity of the American people and the strength of their finances.”

A toothless and powerless Fed, possibly led by its last independent leader. Alan Greenspan would be spinning in his grave if he were already dead. Which he is not, and thus subject to indignities such as these.

Economists Give Jerome Powell a Grade of B-Minus on His Job Performance [WSJ]
Powell Lauds Fed’s ‘Precious’ Independent From Politics [WSJ]

Not Jim Cramer, who saw this:

And then felt this...out loud...on TV:

"I really miss Janet Yellen. I miss her because what she would do is say, 'you know I need more inputs. I'll look at the market, it's down 500 points. Maybe we should make some calls,'" he said.
"She was a student. She wasn't a teacher. She was a student and she learned from people," he said.

We miss her too, Jimmy...we miss her too.

When the New York Fed reached across the continent to grab San Francisco Fed President John Williams as its new leader, there was a fair amount of carping. In part, this was because some people think—in spite of outward appearances to the contrary—that he wasn’t very good at his job and thus didn’t deserve a promotion. But mostly, it had to do with appearance, full stop.

"The New York Fed has never had a woman or a person of color at its helm, and the Federal Reserve Bank only just last year added its first black regional bank president," Booker wrote in a Bloomberg View column. "If we're serious about creating an inclusive and sustainable economy, no one should be left on the sidelines…."

Williams was inserted into the search process late in the game and over and above qualified women who had already been in the running….

Now, in point of the above, the San Francisco Fed doesn’t really have much to prove: After all, before Williams, it had been led by a woman; perhaps you remember her? And Mary Daly certainly fits the bill for the job before considering matters identity: A researcher who’s been with the S.F. Fed for more than two decades and who was mentored by Janet Yellen herself, there’s no quibbling with the usual qualifications. Still, we can’t help but think the S.F. Fed search committee rather enjoys sticking it to the people who just stole their leader a little bit.

As a Missouri native and high-school dropout who was living on her own at age 16, she will add a distinctive perspective to a group dominated by men whose two-day meetings eight times a year set interest rates for the world’s largest economy.

She will be one of three female Fed regional bank presidents. She is also the first lesbian to hold a Fed policymaking post.

Mary Daly, labor expert, picked to run San Francisco Fed [Reuters]
Daly appointment shows diversity gap between regional Feds [Reuters]
Yellen Recommends Fed Formalize ‘Lower-for-Longer’ Guidance on Rates [WSJ]

But the gig can suck if you have a major economic crisis, global macro uncertainty, or an emotionally adolescent chief executive psychologically incapable of understanding that the whole world is designed to make his life easier. Jay Powell has one of those problems.

Guess which...

“I’m not thrilled with his raising of interest rates, no. I’m not thrilled,” Trump said in the interview, referring to Powell. Trump nominated Powell last year to replace former Fed Chair Janet Yellen.

But that doesn't mean he won't soon have the others...

U.S. stocks dipped after Trump’s comments to Reuters and the dollar .DXY edged down against a basket of currencies.

Hey, at least Jay can do what his predecessors have done in times gone by; take heart that the man sitting in The Oval Office respects the American democracy and will put his country first, respect the power of the Federal Reserve and steer the ship accordingly...

Trump, who also criticized the Fed as a candidate for president in 2016, said other countries benefited from their central banks’ moves during tough trade talks, but the United States was not getting support from the Fed.
“We’re negotiating very powerfully and strongly with other nations. We’re going to win. But during this period of time I should be given some help by the Fed. The other countries are accommodated,” Trump said.

That sound you hear is Janet Yellen laughing so hard she peed a little.

Exclusive: Trump says not thrilled with Fed's Powell for raising rates [Reuters]

This thirst for a bulging markets is what led Trump to jettison Janet Yellen. Sure, she oversaw an almost historically robust trend in her reign as Fed Chair, but she also had that annoying kneed to raise rates, and nothing causes a hard market to go limp like rising rates. So Trump went and got him his own Fed Chair, a guy he could rely on to do what a good Fed Chair does; manipulate the economy to help the markets and make his boss, the president, look good [just play along].

But it turns out that Trump's handpicked guy, Jay Powell, was never a sworn liege of Emperor Trump. No, no, no, Jay Powell was always down with his ride-or-die homie Janet Yellen, and nothing was ever going to change that...

U.S. stocks traded lower Tuesday after testimony from new Federal Reserve Chair Jerome Powell.
The new chair signaled the central bank could hike rates more than three times this year in an effort to keep the economy from overheating, sparking anxiety among equity traders.

Jay Powell is J-Yellz trap queen for life. He DGAF what petty bitches like the president wants. All Jay-Pow cares about is consistent monetary policy. The kind he came to appreciate while watching the realest lady he's ever been around do it for years. Hell, he even sounds like her...

"We've seen some data that in my case will add some confidence to my view that inflation is moving up to target," Powell told lawmakers. "We've also seen continued strength around the globe. And we've seen fiscal policy become more stimulative. So I think each of us is going to be taking the developments since the December meeting."

We wouldn't be surprised if Jay forgoes actually saying anything of his own the next time around, electing instead to play a clip of Yellen from the year previous, snapping his fingers over his head and braying "YASSS, QUEEN!"

Dow falls 150 points after Powell signals Fed will keep raising rates to contain inflation [CNBC]

The statement issued at the meeting also sets up the Federal Reserve to more firmly focus on prices and meeting its long-run inflation target as a primary policy concern under incoming Chairman Jay Powell.

The re-shuffled Federal Open Market Committee opened 2018 by keeping interest rates at a target range of 1.25% to 1.50%, and generally kept their outlook for continued low unemployment and improving growth the same as at their final meeting last year. There was a bit of a muddled message then, though, as two FOMC officials cast dissenting votes to keep rates lower, and Yellen faced questions about the bank's forecast for a number (between 3 to 5) of rate hikes in the next two years even though inflation has continued to run below the Fed's long-run two percent target.

The new committee membership clarified things at this January meeting, and displayed the incrementalist and clear-signaling approach to nudging its tightening cycle forward that defined Yellen's era. They noted that, while still low, evidence of wage inflation has begun to rise in recent months, and said that they believe inflation will move up during the next twelve months. Many economists and Fed officials have said that wage inflation will precede broader increases in prices, so the committee is essentially signaling here that they sense the first rumblings of upward pressure that will take inflation to or past their 2% target in a consistent manner.

Yellen will certainly be remembered for leading the central bank's gradual but consistent tightening of policy, and push to move interest rates off the zero-bound where they had fallen during the financial crisis. That task, at least in January 2018, appears to have been a major policy success (and an unexpected one for critics who suggested Yellen's dove-ish tendencies would prevent her from any sort of tightening regime). As part of this effort, Yellen and other policymakers demonstrated a mastery of the communication and forecasting tools developed under her predecessor Ben Bernanke. Rather than being subject to the cryptic vagaries of a single policymaker as they were under Alan Greenspan, market expectations are now much more systematically and coherently guided.

This was an important development: the Fed had never worked its way out of a rock-bottom rate stance before, and Yellen had seen firsthand during the 2013 Taper Tantrum how edgy and volatile markets could be when the Fed signaled that it was drawing back any amount of the enormous support it had deployed to stabilize the economy. So it is impressive that the Fed has materially lifted rates and tightened policy, as well as settled on and started a plan to shave trillions from its balance sheet, all without upsetting the progress made on growth and improving the labor markets.

Which brings us again to this first statement of 2018. The consistent, and consistently inexplicable shortfall of inflation from the bank's 2% target amid all the economic improvement, has been the one area where the bank has fallen short on its own goals during the Yellen era. The FOMC hinted in this statement that, under Powell, inflation now may begin taking a front seat when it comes to policy deliberations. Then again, Powell is a bit of a cypher when it comes to monetary policy, and Yellen's time as a moderate policy-tightening chair is a reminder that economic necessity can lead to outcomes that would be hard to predict when the central bank gets a new leader.

Among the new regional bank voting members later this month will be Cleveland Fed President Loretta Mester, who has tended to a more hawkish stance than the rest of the committee during her time as Cleveland president, but is probably the most likely regional bank president to play the consistent dissenting role that Neel Kashkari played this year (though she will likely do so in the more traditional, professorial central banking style than Kashkari's online confession essays at Medium). Mester dissented in favor of higher rates in 2016 when she was a voting member, and has made it clear she sees reasons for lifting rates steadily in 2018.

The rest of the incoming committee membership from the regional bank is a bit more unpredictable, however. The Atlanta Fed's president, Raphael Bostic, is starting his first year as a voting member on the FOMC, so it is hard to predict how willing to voice public disagreement he'll be. His speeches throughout the second half of last year, though, make it clear that he will favor easier policies and slower tightening of financial conditions. In his first speech at the bank, for example, he said economists probably don't fully understand the reasons for lower-then-targeted inflation and that policy then was in a good spot. More recently he suggested that three rate increases this year could be too swift of a pace for his tastes, which would be a slower tightening than other top Fed officials currently predict.

San Francisco President John Williams is also a traditionally more dove-ish policymaker who is likely to view issues similarly to Bostic. And while new Richmond Fed president Thomas Barkin will represent the regional bank with a history of inflation obsession, he is not an academic economist and may bring a more malleable worldview to the table than previous Richmond president Jeff Lacker, whose nightmares were haunted by the specter of hyperinflation.

While that means the rotating regional members are likely to be split on policy, the real potential transformation on the committee could come in the governors voting bloc. In recent years that group, led by Janet Yellen, has displayed an instinct to tighten rates cautiously.

But Chair-in-waiting Jerome Powell, a reliable consensus voter under Yellen, could choose to chart a different path now that he is the most influential voice at the central bank. Marvin Goodfriend, who President Trump has nominated to be a Fed governor, was a sharp critic of policy direction under Janet Yellen and Trump also has at least one more board position to fill. Another strong and well-respected hawkish voice could materially swing the balance of the committee's discussions and policy approach this year -- especially if that new member sees asset prices hitting all-time highs and an economy that continues to expand.

On the bright side, she’s undoubtedly surprised and relieved that her successor will be Jay Powell and not Gary Cohn or Neel Kashkari or Kevin Warsh. And in spite of fears that her 2017 would be spent putting out economic fires lit by the president, the presence in the Oval Office of a deranged megalomaniac with the intellectual and emotional bearing of a sugared-up attention-deficit-disordered six-year-old, the year was eerily quiet from a central banker’s perspective, allowing Yellen to be at her bureaucratic and even-keeled best. And also to enjoy her farewell tour: One last visit with Jeb Hensarling, one last chance to get deep into her cups at Jackson Hole, launching the end of the quantitative easing program she was so instrumental in building, having laurels thrown at her feet.

What comes next—the consequences of that unwinding, the consequences of Trump’s tax heist, whatever the hell bitcoin is gonna do—is not her problem anymore. J-Yells out.

The outlook provided by the FOMC in its dot plot release last week puzzled reporters during the press conference and was certainly more muddled than investors would expect given the bank's ongoing moves to tighten monetary policy. Fed officials said that while they expected employment and wages to continue to improve through next year and 2019, as well as inflation to rise to their long-run target, they also estimate that growth will fall back to around the 2.0% level in 2019 after a spike next year.

Part of what Fed officials are recognizing with this outlook is that their reduction of the bank's balance sheet holdings over the next couple of years will likely cause a real drag on economic growth and presents a serious risk for both financial markets and the broader economy.

And the risks of both a growth drag and other potential unforeseen risks is likely to increase with time because of the plan upon which policymakers settled to reduce its asset levels. The majority of the FOMC announced agreed earlier this year that they would begin letting about $4 billion of mortgage-backed securities and $6 billion of of Treasuries roll of their balance sheet monthly; those numbers will rise each quarter until the central bank is letting $20 billion in MBS and $30 billion in Treasuries expire on its balance sheet each quarter. That means, then, that in a little over a year the asset declines will jump from $30 billion total on a quarterly basis to $150 billion and that in 2019 alone the Fed would see its balance sheet size fall by $600 billion.

Considering that Fed officials have long touted the positive effects of their quantitative easing programs -- especially the strong impact of their earlier rounds of asset purchases on financial conditions and GDP -- it should not be surprising that they foresee real downward pressure on growth when the full weight of the asset declines begin to hit, even as they predict that employment, wages and inflation will all move in favorable directions. One metaphor that increasingly comes to mind is avalanche control: the Fed is sitting on a mountain of liquidity that it needs to substantially reduce over time in the name of financial caution. At the same time it needs to do it in a way that does not trigger a larger economic convulsion and sweep away all of the economic gains of this decade -- which is a real possibility whenever central banks try out novel policies.

Of course, that's not the messaging that has accompanied the balance sheet drawdown. Most Fed officials across the policy spectrum (with the notable exception of Minneapolis Fed head Neel Kashkari) have gone out of their way to emphasize that they view the asset reductions as a background policy phenomenon, and one that will essentially run on "autopilot" and require little adjustment unless there is a major change in the economic and financial environment. That "nothing to see here" attitude was obvious during last week's meeting and press conference, when Chair Janet Yellen noted that the FOMC's policy statement did not discuss the balance sheet normalization and then avoided any real discussion of its potential impacts even though it is no longer theoretical and the Fed is presumably trying to estimate how it is affecting the economy.

There's another important factor at play with the balance sheet normalization process: how the Fed pulling its support from the MBS and Treasuries markets affects those markets, and by extension rates. The bank pretty reliably is able to hit the very target of its interest rate target, but it's reasonable to surmise that a smaller Fed balance sheet could tighten conditions across the financial world beyond where the Fed is setting its primary funds rate.

And as Kashkari noted in his essay on his dissenting vote, the yield curve has begun to flatten, which could be a warning sign of an impending slowdown or greater financial unrest moving forward. If the Fed's balance sheet normalization process hits the functioning of those markets harder than the bank expects, incoming Chair Jerome Powell and his colleagues could find themselves dealing with something much more severe than a step back in growth.

And since Ron Paul is the greatest one trick pony in American political history, do you guys want to wager a guess who he blamed for the CryptoBoom™?

According to Paul, cryptocurrencies have become an asset that rivals the bubble he sees in stocks.
"I think it's going to continue to do exactly what it's doing. It's going higher and it's going lower," he said Tuesday on CNBC's "Futures Now." "We can look at what's happening now, which to me is a climactic end of QEs."

That's a subtly unsubtle swipe at The Fed y'all, but you know Ron so he's gonna make that more obvious...

Paul, who has done commercials touting currency competition for a company that benefits from bitcoin's rise, views the crypto craze as a side effect of central banks doing several rounds of quantitative easing to cope with the last financial crisis.
"I look at the problems we face. I think they're gigantic and people are desperate and looking everywhere. Why would they buy bonds that pay negative interest rates? Why would they buy stocks, and say well this time it's different? " asked Paul. "Cryptocurrency is a reflection of the disaster of the monetary dollar system."

Further proof that old libertarians never die, they just start blaming obscene Litecoin valuations on Janet Yellen.

Bitcoin is biggest bubble of them all, and it’s the Fed’s fault, says Ron Paul [CNBC]

This is the time of year when everyone gets together and pens 100-page tomes, chock-full of recos that, while based on a set of ostensibly reasonable assumptions and models, will almost invariably fail to play out.

One thing everybody has going for them headed into 2018 is that the consensus take on risk assets rests on the now ubiquitous “Goldilocks” narrative, the pillars of which are synchronized global growth but still subdued inflation in developed markets.

There are a lot of reasons to suspect that narrative may indeed end up approximating reality, not the least of which is that if it doesn’t, things could go to hell in a handbasket.

That’s not so much an attempt at hyperbole as it is a statement of fact. Central banks have put themselves in a position where the very thing they’ve spent nine years trying to engineer cannot - must not - actually materialize to any significant degree.

Sure, the Fed, the ECB, and certainly the BoJ wouldn’t mind if inflation rose sustainably to target, but if it turns out that the deflationary impulse created by all of those factors which have been summarily dismissed as “transitory” (e.g. technology) evaporates at the same time the post-crisis regulatory regime is dismantled in the U.S. and if that’s compounded by looser fiscal policy (i.e deficit spending), well then all that “missing inflation” could come calling at once. If oil prices were to rise at the same time, we could end up in a situation where everyone (including and especially central banks) is caught woefully behind the curve. That would necessitate rapid tightening and a disorderly unwind of the bond trade. From there, it’s curtains. Plan and simple.

So circling back, the only way this doesn’t go off the rails is if inflation remains muted, thus providing cover for central banks to stick to a gradualistic rollback of accommodation, characterized by an ongoing dialogue with markets. Because after all, that’s what forward guidance is - a consultation with markets that helps policymakers determine ahead of time what the likely reaction would be in the event they were to do [XYZ].

The consensus for U.S. stocks is that robust earnings growth (supercharged by tax cuts) will play out against that “Goldilocks” backdrop. That’s pretty much the long and the short of it (no pun intended) when it comes to how most desks are looking at this.

Goldman was out on Tuesday with their 2018 S&P outlook which they’re calling “rational exuberance”, something I’ve variously mocked as an oxymoron. One cannot be completely rational and exuberant at the same time. Inherent in the word “exuberance” is some degree of irrationality. Anyway, here’s a fun chart that juxtaposes the “rational” with the “irrational”:

And make no mistake, Goldman is hardly the most “exuberant” shop on the Street.

Lurking in the background in each and every one of these outlook pieces is a palpable sense of angst regarding what would happen in the event inflation did suddenly show up and force central banks’ to move more aggressively. Albert Edwards has been warning about this a lot lately (when he’s not busy warning about something else). The notion that if central banks finally get what they want it could paradoxically be the death knell for the risk rally hangs over everyone’s forecasts like smog over Beijing on a particularly dirty morning.

Implicit in that is the flipside (because the flipside of something is always implicit). If the “transitory” factors keeping inflation subdued turn out to be structural, endemic and more powerful than anyone anticipated, well then it’s possible that inflation could decelerate, necessitating still more easing and still more dovish forward guidance. In that scenario, it’s feasible that risk premia could compress even further and stocks could blast off into the goddamn stratosphere.

Ok, so if you follow BofAML’s Michael Hartnett you know that he’s pretty keen on pushing the hyperbole envelope as far as it can be pushed in research that presumably has to be vetted by compliance.

Personally, I love Hartnett’s stuff. It’s colorful (figuratively and literally if you’ve seen the charts), it’s engaging, the format is super-fun, and his notes serve as a reality check in that kind of way where reality isn’t conforming to Hartnett’s warnings, but you know that on some level he’s probably right.

Well, Hartnett’s year ahead piece is called “The Big Top” and while he concedes that risk assets are likely to remain buoyant in H1, he also lays out a series of nightmare scenarios the last of which sounds like something out of the opening sequence from Terminator 2.

“The Big Top” comes in H1 as “the last flames of QE, US tax reform and robust EPS incite full capitulation into risk assets.”

Nothing particularly novel about that. But then it gets interesting.

“The Big Long” is volatility. Since at least August 24, 2015 (that would be the morning when the implications of the Chinese yuan devaluation finally dawned on the world all at once and triggered a nauseating wave of selling that culminated in a 1,000 drop at the open on Wall Street), there’s been a chorus of doomsayers warning that systematic, vol.-sensitive strats might one day be forced by an acute bout of volatility to deleverage into a falling market, thus triggering a flash crash of catastrophic proportions. Here’s Hartnett on that:

Volatility...peak positioning, profits, policy = peak returns and trough volatility; 50-year low in stock volatility, 30-year low in bond volatility likely to be followed by flash crash (à la ’87/’94/’98) in H1.

Next is “The Big Short”. For Hartnett that’s corporate bonds and his punctuation-filled “equation” amounts to the same worry outlined above: namely that the sudden emergence of inflation on the scene could prompt central banks to abruptly cancel their “consulting” agreement with investors in the interest of moving aggressively to catch up. Here’s Hartnett:

Corporate bonds...higher inflation, higher debt, higher bond volatility and end of QE era most damaging for corporate bonds; game-changer = wage inflation shatters Goldilocks consensus (no fear of Fed/ECB) via higher credit spreads.

But believe it or not, none of that is the scary part. Recall what we said above about what happens in the event inflation actually decelerates meaningfully. To wit:

If the “transitory” factors keeping inflation subdued turn out to be structural, endemic and more powerful than anyone anticipated, well then it’s possible that inflation could decelerate, necessitating still more easing and still more dovish forward guidance. In that scenario, it’s feasible that risk premia could compress even further and stocks could blast off into the goddamn stratosphere.

If you follow Michael’s notes, you know how to translate that from Heisenberg into Hartnett. That scenario would be “Icarus unleashed,” a reference to Michael’s long-running characterization of the relentless runup in equities as something akin to Icarus and his wax wings. To wit, from Hartnett:

Tech bubble...AI/robots cause wage deflation extending era of excess liquidity, bond yields fall, Nasdaq exponential; “Icarus unleashed.”

That sounds “good” in theory for anyone who’s long risk assets and especially for anyone who took Josh Brown’s advice and “just bought the damn robots.”

But Hartnett thinks you might want to consider the possibility for that scenario to create actual class warfare. The idea, I guess, is that everyone who was previously satisfied with the extra $20k they made in their E*Trade account will suddenly realize that when Icarus is “unleashed” and flies off into the wild blue yonder, it necessarily means that people like Jeff Bezos have become trillionaires and that the already gaping wealth divide in America has been transformed into a chasm that approximates a thousand Grand Canyons.

That’s when the torches and pitchforks come out. Here’s Hartnett one more time:

Bubble could end in 2019 with bear market on hostile Fed hiking, Occupy Silicon Valley and War on Inequality politics.

That’s when Josh Brown’s “just buy the damn robots” reco will be commandeered by the downtrodden masses and modified into a battle cry as the peasant hordes descend on Silicon Valley shrieking “Just murder the damn robots!”

So if you’re inclined to ask “what could go wrong?”, just make sure you want the answer.

And while the world burns, Janet Yellen will be sitting quietly somewhere sipping chamomile, knitting a sweater and whispering to herself: “Free at last, Free at last, Thank God almighty I am free at last.”

Catch more Heisenberg over at Heisenberg Report.

Still, his time is short. And one thing Mark Carney has always wanted to do is something Yellen has already done, severaltimes: raise interest rates. Now, the terminally weak British economy has prevented him from doing so during his first four years on the job. Indeed, the highly inadvisable decision of the British people to leave the European Union forced him to actually cut rates. But he’ll be damned if he goes back to Canada without getting a thrill from tightening monetary policy at least once, and figures now’s as good a time as any to make such an inadvisable move himself.

Led by Governor Mark Carney, the Monetary Policy Committee voted 7-2 on Thursday to increase the benchmark rate to 0.5 percent from 0.25 percent. The minutes of their meeting underscored worries that the economy is fragile as the 2019 split with the European Union nears….

The decision to hike comes after multiple false alarms from Carney since he took over as governor in 2013, most notably in 2014 when his whipsawing of investors led to him being tagged an “unreliable boyfriend.”

There are warnings Carney is making the wrong move at the wrong time. In more ways than one, it’s an unusual rate increase.

With Brexit hanging over the outlook and the expansion feeble, the BOE’s not seeking to quell price pressures generated by strengthening growth. Rather, the bank is trying to slow inflation driven above its target by the weakening of the pound and the slide in the economy’s long-term trend.

BOE Raises Interest Rate for First Time in More Than Decade [Bloomberg]
Bank of England Rate Decision Tests Carney’s Credibility [Bloomberg]

President Trump continues to play his version of Apprentice: Federal Reserve Chair, and over the weekend a rash of headlines suggested he had settled on perhaps the most sensible Republican option available to him: current Fed board member Jerome Powell.

Prediction markets had also labeled Powell the odds-on favorite, though a slight wrench was thrown into the proceedings yesterday when he reportedly surveyed Republican Senators on their preference between Powell and Stanford economist John Taylor, who was seen as an outside contender but apparently has made the final cut to two options (and according to some reports won the straw poll in the room).

Powell has emerged as the leading Fed insider for the central bank's top job, though he does represent a departure in some ways from former chair Ben Bernanke, current Chair Janet Yellen, and even Taylor, all of whom made their names as pre-eminent academic economists. Powell, on the other hand, was a lawyer and earned his bona fides financially by rising through the investment banking ranks, working at the U.S. Treasury under George H.W. Bush and as a partner with the Carlyle Group.

This background informs Powell’s stance on financial deregulation, which is perhaps his most important distinguishing feature from Yellen. The current chair has indicated that she will oppose efforts to undo major portions of Dodd-Frank. Because of her legacy power and the byzantine nature of the financial rule making process, she could throw up major roadblocks to giving Wall Street free reign in markets again, which is perhaps why she has reportedly fallen by the wayside as an option.

Powell, on the other hand, has indicated that he is willing to play ball on the issue. He has argued that many of the rules are burdensome to smaller and medium-sized banks, a fact that would likely win him the support of smaller financial institutions which have strong sway in Congress. But Powell has also said that many of the rules applied to larger bank need to be simplified — central bank and financial world-speak for “weakened” — and indicted that he would support axing other rules for large banks and easing the annual stress test process. That last point in particular would also win him a healthy amount of support from the largest financial institutions, which loathe the annual capital-testing process.

Another major selling point for Trump in nominating Powell (especially compared to other rumored candidates Kevin Warsh and Taylor) is his dovish instincts on monetary policy. Powell has generally been viewed as one of Yellen’s most reliable allies on monetary policy issues as she and predecessor Bernanke implemented extraordinary easing measures.

While Trump railed against the low interest rates of the last decade during his campaign, the politician and real estate developer inside him quickly reversed course once he took office and admitted that he likes a low rate policy. Warsh, on the other hand, would almost certainly have pushed a much more aggressive tightening of policy — something that Trump, like his spiritual predecessor Nixon, will oppose for political purposes and strongly maneuver to prevent. And Taylor would bring his rather inflexible academic biases to policymaking and try to tie policy to his eponymous rule (check out that equation for a real fun time). Under Taylor's rule, and depending on how exactly it was calculated, rates would currently be substantially higher -- almost to 4% with certain assumptions.

The prospect of the Taylor rule playing a concrete part in policy has long been anathema at the Fed; Taylor's nomination would rouse the bank in all its technocratic fury to undermine his nomination process. Trump does love a political fight, but might be cautious to pick one that would lead to substantial uncertainty in markets about the future of the Fed and raise the prospect of tighter interest rate policy.

Whatever his public shouting about the central bank policy in the election, then, Powell offers the most pragmatic, and politically palatable, choice for Trump to make. We'll find out soon whether those factors, or deference to GOP Senators and his penchant for shaking up the established order, carries more weight.

Yellen herself appears to have an outside chance to retain her position, according to many reports, after previous favorite Globalist Gary Cohn fell from Trump's favor. Since that time Warsh's name has circled as the most likely nominee, while current governor Jerome Powell has also emerged as another finalist for the role.

Either Yellen or Powell would likely hew closely to the monetary policies of recent years; Powell has rarely differed from Yellen on major policy issues, and the biggest gap between the two appears to be on financial deregulation, which Powell seems more willing to accept. Any deviations from the bank's current orthodoxy under Yellen or Powell would likely be a response to changing circumstances or composition of the Fed board and Federal Open Market Committee. Certainly, as part of the group that settled on the current approach to balance sheet policy, either would continue the recently-initiated policy of allowing assets to mature and roll of the bank's balance sheet.

Warsh, however, has intimated that he would impose a very different future on the bank broadly, and if you dive a bit deeper into his history as a policymaker, it's easy to see why many financial world observers think a Warsh-led bank could tack very differently on policy matters. That's not only true of rates, where Warsh is more inflation-focused and hawkish than Yellen and some of the other current governors, but especially true of balance sheet policy.

In 2010, when Warsh was a governor and the FOMC in the early stages of building the gargantuan balance sheet it is only now beginning to roll back, policymakers were already engaged in a debate about the exit strategy for their asset purchases. (FYI: As a historical documentation of the laughable hubris of Fed policymakers, the transcripts from 2010 are rich: Warsh himself correctly identified that the major corporate world would lead the recovery, but far from accurately predicted that would also mean an upsurge in labor productivity) A key point in that 2010 debate was whether the bank would simply allow assets to roll off the balance sheet, or whether and how the bank would engage in sales of the assets once it deemed them no longer necessary.

The Bernanke and Yellen-led bank have came down firmly on the former position, with Yellen and other policymakers promising an "autopilot" like reduction of the balance sheet. But Warsh took a very different view at the time, and one that would be a massive departure from current policy, and argued that "if properly communicated, financial markets seem to me to be ready to incorporate clear, credible, properly sized, prospective communications about asset sales." 

He added in the meeting that he was against signaling that the bank would hold on to its large balance sheet for "decades" or "allowing normal maturity schedules to dictate our holdings," which is exactly what the central bank has now declared it will do. While this position is one born of a more dove-ish policy persuasion and means more accommodation for markets over a longer period of time, it is also that comes from a sense of caution. Because Yellen and other officials have no idea, really, what sort of impact asset sales would have on markets and the economy, and because the bank has never attempted anything like large-scale asset sales, they have attempted to make the process of balance sheet reduction as conservative as possible.

Warsh mostly waved those concerns aside in 2010, suggesting instead that the bank should proactively look to push assets out of its door in a controlled but nevertheless far more aggressive fashion.

"We bought assets people didn't want at prices they wouldn't pay. To the extent that market are now interested in buying these assets ... we should take them up on that rare opportunity. So I'm an opportunistic seller of assets," Warsh told Yellen and others.

Interestingly, he has also said that the Fed should coordinate its plans for drawing down its balance sheet with the U.S. Treasury. This proposal would likely meet with a healthy amount or resistance at the Fed, which does not typically consult with the Treasury on monetary matters in an effort to guard a policy independence that it considers sancrosanct. 

Here, at least, Warsh’s approach seems far more sensible than the one offered by Yellen or Powell — the Fed has intervened in an unprecedented manner in the U.S. Treasury market, which, despite being the world’s most important asset market, is also somewhat backward: full of smaller players and strangely bifurcated, worryingly opaque and, according to some in the financial industry, less liquid than the world's safe haven market ought to be.

So, whether markets can expect more of the same or more policy experimentation depends now on, gulp, Trump.

"I actually have a very non-consensus point of view. I think it's going to be Neel Kashkari," the the CEO of DoubleLine Capital told the Vanity Fair New Establishment Summit on Tuesday in Los Angeles. "He happens to be the most easy money guy that's in the Federal Reserve system today and that's why he may win."

Kashkari's low-rates bona fides aren't all he has going for him. As we've discussed before, the Minneapolis Fed prez has a number of qualities that might appeal to Donald Trump for Fed chair, from an active Twitter life to a disdain for convention to a willingness to entertain breaking up the banks. But these are just matters of style. What counts is policy. And that's where Trump and Kashkari really jibe:

“I think the President, if he’s going to retain his base, needs to deliver something to the disaffected middle class,” Gundlach said. “A stronger dollar is not good for achieving that agenda. A weak dollar is actually positive. And easy money is more a friend of a weak dollar than tight money.”

While we would delight in a Neel Kashkari Fed chairmanship – if only for the inevitable Dimon-Kashkari blog beefs – the odds are long. As CNBC reports, Kashkari's name is not among those that have been presented for Trump's thoughtfulconsideration. Kevin Warsh and newcomer to the race Jay Powell are the likeliest picks, especially now that Janet Yellen's attempts at ingratiation have apparently fizzled. This is despite Warsh's decidedly anti-low-rates outlook and Powell's establishment position.

The fact is, we just don't deserve a Kashkari Fed chairmanship. There isn't enough grace in this world for a central banker who spends most of his time o tweeting dog memes and chopping wood for fun.

Jeff Gundlach says Neel Kashkari will be the next Federal Reserve chair [Yahoo Finance]
Jeffrey Gundlach believes Neel Kashkari will be next Fed chief because he's an 'easy money guy' [CNBC]

Mr. Warsh, a veteran Republican economic policy maker, is married to Jane Lauder, granddaughter of cosmetic icon Estée Lauder. His father-in-law, businessman Ron Lauder, has been lobbying the White House to have the president name his son-in-law to the central bank’s highest post, said people familiar with those conversations.

But Warsh does have one notable mark against him. Although being the son-in-law of an heir to a makeup fortune might put one high in the running to head the world's most important central bank, Warsh has stood in opposition to what is evidently Trump's only monetary policy concern: low rates. America, as we know, is a smoldering hell-hole desperately in need of Trumponomics, which can be understood as an amalgamation of deregulation and massive tax cuts, all to be held together with a liberal dose of easy monetary policy.

Warsh feels differently. He resigned as Fed Governor in 2011, at odds with the Fed's easy money policies. He has urged the Fed to take on a firmer “strategy” on normalizing rates. Warsh is not, it's safe to say, a low-interest-rate guy.

But Warsh does have one thing going for him in a White House that installed at Treasury a guy who, in August 2007, said housing and debt markets weren't a big part of the economy. To his credit, Warsh has an impressive and lengthy record in being wrong about important economic matters. And that gives him a leg up.

Not only that, but he has the added benefit of having been wrong in some of the same ways as our Commander in Chief. Let's take a tour:

Pre-Crisis

Kevin Warsh in March 2007, arguing that derivatives and securitization were going to keep us safe:

First, liquidity is significantly higher than it would otherwise be due to the proliferation of financial products and innovation by financial providers. This extraordinary growth itself is made possible by remarkable improvements in risk-management techniques. ...Look no further than dramatic growth of the derivatives markets. In just the past four years, notional amounts outstanding of interest rate swaps and options tripled, and outstanding credit default swaps surged more than ten-fold. These products allow investors to hedge and unwind positions easily without having to transact in cash markets, expanding the participant pool. Syndication and securitization also lead to greater risk distribution. An important source of strength has been financial innovation, and while we have yet to see how some new products will play out in a more stressful environment, there almost certainly will remain a greater dispersion and insurability of risks.

Donald Trump, on launching one of his many perfectly timed business ventures:

In the spring of 2006, the tycoon hosted a glitzy event at Trump Tower to introduce Trump Mortgage LLC, a new firm that specialized in selling residential and commercial real estate loans. He devoted a floor of the Trump Organization headquarters at 40 Wall Street to the new business. And his picture appeared atop the company website with the instruction: “Talk to My Mortgage Professionals now!”

“I think it’s a great time to start a mortgage company,” Trump told a CNBC interviewer in April 2006, adding that “the real estate market is going to be very strong for a long time to come.”

Recovery

Kevin Warsh, inflation whisperer:

In March 2009 he told his Fed colleagues that he was “quite uncomfortable with the idea of purchasing long-term Treasuries in size” because “if the Fed is perceived to be monetizing debt and serving as a buyer of last resort in the name of lowering risk-free rates, we could end up with higher rates and less credibility as a central bank.” ... The argument predicted a sudden break in faith with the United States of America — one day the market would say “enough” to all this government effort to boost the economy and would stop buying its bonds. Not only was Warsh wrong but he was as far from right as you can get. Buyers gobbled up government bonds. Instead of spiking, treasury rates reached historically low levels where they have stayed for years.

Donald Trump, inflation whisperer:

“They’re creating phony numbers and they’re doing it through stimulus and the stimulus many people would say is the worst thing that can happen,” Donald Trump told a fawning Maria Bartiromo on CNBC Thursday. (Bartiromo called him a “genius.”) The Donald went on to say that the Fed’s decision will cause the dollar to lose value and “inflation to start rearing it’s ugly head.”

Also:

The Fed continues to recklessly flood the market with dollars. This will eventually create record inflation. It has to stop. #TimeToGetTough

— Donald J. Trump (@realDonaldTrump) December 1, 2011

And beyond Kevin Warsh in the WSJ in 2015: The Fed Has Hurt Business Investment. About which Larry Summers wrote:

My friends Mike Spence and Kevin Warsh, writing in yesterday’s Wall Street Journal, have produced what seems to me the single most confused analysis of US monetary policy that I have read this year...Perhaps Spence and Warsh are on to something that I am missing. I’m curious whether they can point to any peer reviewed economic research or indeed any statistical work that backs up their views. I am certainly open to any new evidence or new argument after all that has happened in recent years that easy money reduces business investment. And there is plenty of room for debate over policy. For now though I would put the Spence-Warsh doctrine that easy money reduces investment in a class of propositions backed by neither logic nor evidence.

Donald Trump in 2016:

“They’re keeping the rates down so that everything else doesn’t go down,” Trump said in response to a reporter’s request to address a potential rate hike by the Federal Reserve in September. “We have a very false economy,” he said. “At some point the rates are going to have to change,” Trump, who was campaigning in Ohio on Monday, added. “The only thing that is strong is the artificial stock market,” he said.

And today:

RECORD HIGH FOR S & P 500!

— Donald J. Trump (@realDonaldTrump) September 29, 2017

It goes on like this. Whatever your views on the effectiveness of QE or the wisdom of extraordinarily low rates, you have to offer critiques that make sense. And predictions – if you're willing to make them – should at least correspond in some small part with reality. Warsh has a pretty strong record of falling short on both those fronts. Accordingly, we look forward to welcoming him to the Fed next year.

Trump Meets With Former Fed Governor Kevin Warsh About Chairman Job [WSJ]
Just Say No To Kevin Warsh [The Niskanen Center]
Jared Kushner for Fed Chair? [Sam Bell]

The decision fully commits the Fed to a path of policy tightening, even with growth numbers remaining "eh" and Fed officials now openly puzzled about why they can't drive inflation levels higher.

The Federal Open Market Committee said today that it was leaving interest rates unchanged, but also announced that it will begin allowing assets to roll off its balance sheet next month. The Fed has been broadcasting the move for nearly a year, including outlining its methods for doing so in June, and so it was mostly expected. Nevertheless it is a momentous and historic move and represents the final step on the path to reversing the steps the bank took to stabilize the financial system in the wake of the crisis last decade.

It is also a policy activity in which Fed officials have no experience, which is perhaps why they decided to slowly escalate the amount of assets they are going to see slide off the balance sheet; this method allows the Fed to see how big of an impact the asset reductions are having, and adjust interest rate policy accordingly.
Fed Chair Janet Yellen made it clear that the Fed has no plans to tinker with this approach. Interest rates will be the active policy tool moving forward, and it will take another economic tsunami for the Fed to halt or reverse the policy, Yellen indicated during her press conference following the announcement.

To justify this move, and the expectation among policymakers for an additional rate hike this year, Yellen and other Fed officials remain dismissive of inflation numbers that have continued their decade-long shortfall from the Fed's 2% target and predict that inflation will creep toward that 2% target over the medium term.

But Yellen also admitted that policymakers' "understanding of the forces driving inflation isn't perfect," and that the Fed will continue to carefully monitor readings going forward. In fact, during the Q&A, Yellen seemed downright stumped by the inflation shortfall, labeling it a "mystery." That is about as frank as any Fed official has been throughout this period of low inflation, in which labor market improvements and steady economic growth has not translated into the sustained price gains that the Fed's economic orthodoxy would predict.

For the time being, it seems, absent an obvious explanation, it appears that low unemployment and numbers and gravity-defying asset prices are driving the Fed's desire to pull back policy.

Now the question for the Fed, then, is how it handles interest rates when half of its mandate is a black box and it is engaging in balance sheet policy experiments on the fly.

The Fed couldn’t have predicted any of these things. Neither could they have predicted that what began as a few hundred billion in asset purchases would balloon to $4 trillion over the next several years. Nor could they have imagined that, as they convened to plan to the long-awaited unwind of all those asset purchases, the president of the United States would stand in front of the U.N. General Assembly and explicitly threaten to wipe another country off the face of the earth. Also that the president would be Donald Trump.

Yet here we are:

The Federal Reserve on Wednesday likely will announce the beginning of a yearslong program to shrink its bond portfolio and could offer clues about the prospects for another rate increase this year. Officials will release a statement and their updated quarterly economic projections at 2 p.m. EDT, after the conclusion of their two-day policy meeting.

We came into this era innocent and naive. Never having lived through a period when the central bank buys a medium-sized country’s GDP worth of debt over the course of a lazy afternoon, we can be forgiven for predicting hyperinflation or whatever. Now that American QE is over and we’ve got nothing but this lousy stock market to show for it, we should approach the big unwind with at least a modicum of humility. Because really, who knows what the fuck.

Here’s a cautious Jamie Dimon earlier this summer:

“We’ve never have had QE like this before, we’ve never had unwinding like this before,” Dimon said at a conference in Paris Tuesday. “Obviously that should say something to you about the risk that might mean, because we’ve never lived with it before….it could be a little more disruptive than people think,” Dimon said. “We act like we know exactly how it’s going to happen and we don’t.”

For a little more hyperventilation, see Mr. Gundlach:

“You go into a cumulative ... quantitative tightening. So I‘m wondering if this suggests a little more trouble in 2018,” Gundlach said about the reversal of QE. “I am thinking that maybe we have to start going on ‘Trouble Watch’ for the middle part, perhaps, of 2018 with quantitative easing scheduled to go away.”

Both are correct in their own ways. We probably shouldn't be complacent here. The Fed’s balance sheet is like one of those massive spaceships in alien movies that hover ominously over major population centers, their capabilities and intentions unknown. We all kind of acknowledge that it could destroy us, but for now we’re just gonna sit tight and keep a close eye on things. You don’t want to be the guy who stands underneath the pulsing dome at the tip of the UFO and explains how they're probably benign and we’ll all be fine. He usually gets vaporized. Nor do you want to be the raving loon who preaches end times when all the aliens wanted was to share their one weird trick for avoiding extinction.

Still, it’s not like we know nothing going into the great unwind. For one thing, we know who not to listen to: “bond gurus.”

During each of the Fed’s quantitative-easing cycles, yields rose when the central bank was buying and then fell after it stopped. That ran counter to what many expected based on simple supply and demand as the Fed amassed $4.5 trillion of debt and became the single biggest holder of Treasuries.

We were all told that it would be wise to short Treasuries after each round of QE, since who would all the buyers be once the Fed stepped back? Turns out, they were all of us. 

It's hard to overstate how much these nominations will impact the future of the U.S. financial system. Yellen and Fischer's successors will need to manage the drawdown of the bank's balance sheet, as well as the gradual return to higher interest rates -- if indeed those things ever occur. They also will determine how far the deregulatory agenda of the Trump administration and Wall Street advances, especially since the Fed occupies a first-among-equals role in the financial regulatory world. Fischer, Yellen and others have launched a full-throated defense of the regulatory changes mandated by Dodd-Frank, but if Trump fills all four board seats with candidates intent on rolling back those rules or not enforcing them, they'll be able to vote through whatever changes they desire.

And, while Trump's nominations in other policy areas have ranged from curious to terrifying, all the rumored candidates for Fed posts have been a surprisingly vanilla and qualified group of standard Republican policymakers. Among those rumored and possible candidates for the board vacancies and chair positions include:

Gary Cohn - Washington insiders have assumed for months that Cohn is the frontrunner for Yellen's seat when it opens up early next year, but his recent decision to publicly contradict Trump's response to the events in Charlottesville reportedly has him iced out of the Oval Office's cool clique and is, literally, getting the cold shoulder from Trump. "Globalist Gary" is known to covet Yellen's role, and would there be any more gratifying ending to his devil's bargain with Trump than for the piqued president to nominate him to the Vice Chair role instead?

Kevin Warsh - A former board member who stepped down from his role in early 2011, and would likely only be enticed back for the bank's top role, though he could also be open to a role as vice chair on a board dominated by Republican appointees. He was the youngest nominee ever for a Fed board role when he was first appointed, but he impressed his colleagues at the time and acquitted himself well during the financial crisis. Transcripts of FOMC meetings at the time show other board members viewed him as the foremost expert on the workings of global financial markets. On monetary policy, Warsh would probably lead a more hawkish bank than Yellen or Bernanke.

Marvin Goodfriend: Goodfriend's name has been circulating as a potential board member as well. Goodfriend is a bona fide conservative economist who has been critical of quantitative easing and the low rates of the last decade. Goodfriend is a product of the Richmond Fed, which provides itself on focusing on price stability and whose presidents are often the most hawkish members of the FOMC.

Dr. John Taylor: In certain conservative circles, the nomination of Taylor would be a dream scenario and cause for celebration. The Stanford academic is a longtime critic of low interest rate policies, policy gadfly and creator of the eponymous Taylor Rule, a supposed tool for determining interest rates which conservative lawmakers occasionally threaten to make the Fed policymakers heed. It would be difficult for Taylor to get the votes needed in the Senate, however, and any cursory study into his beloved rule reveals that is actually not that useful to ... very wrong.

Randal Quarles: Quarles is already on his way to filling one of those vacancies and becoming the board's vice chair for supervision, a role in which, ironically, he will read the forces of deregulation into the breach.

Of course, these are the leading candidates assuming Trump continues with the weirdly buttoned-down approach he's taken to the Fed thus far -- an approach which has been slow and revealed the Fed to not be a major priority for the administration. We'll find out soon whether more interest rate hikes and a more rancorous debate about financial regulation drives Trump down a more unconventional path.

But because we all live in the dumbest of all possible worlds now, on July 17 Yellen spent her morning doing something out of the ordinary: breakfasting with fashion executive and daughter-slash-political-adviser to the president of the United States of America, Ivanka Trump. 

The payoff? Apparently, this:

Eight days after their one-hour meeting in a private dining room at the Fed, the president told the Wall Street Journal that Yellen was “in the running, absolutely,” for a second term as chair after her current four-year stint expires in February.

Who knows what the circumstances of the meeting were. There's a chance that Yellen requested it, which would certainly be an indication that yes, she does want to remain Fed chair when her term expires next year. More likely, the White House requested the meeting and Yellen was gracious enough to take it.

Whatever the case, it's clear enough from the president's reaction – as well as Steve Mnuchin's recent patronizing compliments – that the Yellen and Ivanka hit it off well enough to keep Yellen off Trump's shit list. But having Ivanka champion her in the White House doesn't really give Yellen much of a leg up over her esteemedcompetition. Ivanka's past hobbyhorses have included staying in the Paris climate accord, not banning trans people from the military and making her dad apologize for “grab her by the pussy.” Her influence over her father is uncertain.

The more interesting question is what Janet Yellen and Ivanka Trump actually talked about. Some possibilities:

• Whether Bachelor in Paradise properly addressed the allegations of sexual misconduct on set
• What it's like to be the most powerful Jewish woman in America
• How to get what you want from “daddy”
• Ivanka's case for patience in unwinding the balance sheet given the secular shift in the neutral rate of interest

Janet Yellen and Ivanka Trump Met Over Breakfast as the Fed Race Heated Up (BBG)

There's plenty about our current historical moment that would qualify as brain-breaking to a time-traveler from the far-off of, say, 2014. Near the top of that list is the phrase “Donald Trump's Fed,” which, like death, is at once certain to happen and impossible to comprehend. Now, thanks to a surprise resignation from Stan Fischer, that reality is coming sooner than anyone could have expected:

The “personal reasons” Fischer cited remain unknown.

As Bloomberg noted, Fischer's departure leaves four of the seven seats of the Fed's Board of Governors vacant. And then there's Yellen, who's timer runs out in February. On that note, here's what she had to say about the resignation of her right-hand man:

Stan's keen insights, grounded in a lifetime of exemplary scholarship and public service, contributed invaluably to our monetary policy deliberations. He represented the Board internationally with distinction and led our efforts to foster financial stability. I'm personally grateful for his friendship and his service. We will miss his wise counsel, good humor, and dry wit.

It's still unclear whether Yellen has a shot at reappointment, but it's probably safe to say that Fischer's departure doesn't help her odds. Fischer and Yellen sang the same tune on post-crisis bank regulation (it'sgood), which kind of clashes with the sounds Trump and potential Fed chairman Gary Cohn have made in support of the vaporous and contradictory collection of thoughts they call the Twenty-First Century Glass-Steagall.

Though the resignation might be a bummer for Yellen, it's a boon for those of us who delight in speculation over which octogenarian crank or get-rich-quick schemer might happen to amble into the Oval Office at the right time and end up the object of appointment chatter. How about an Ayn Rand cosplayer for Vice Chair? Or one of Trump's kids? They've got business experience. Scaramucci kinda ran a hedge fund.

In all likelihood the vacancies will go to guys like Kevin Warsh or John Taylor. But the Trump factor leaves some room for weirdness. Trump is a “low rates guy,” something the Warshes and Taylors of the world are not. It's not inconceivable that we'll get some truly inspired, Ben-Carson-level pick heading into the nation's central bank in the next year.

It's instructive to recall that back in the innocent days of 2014, when Fischer's Senate grilling was underway, the nominee faced scrutiny for the sin of having helped run Citigroup for three years. Compare that to Trump administration appointments like Department of Education pick Julian Schmoke Jr. – whose former employer Devry University just last year paid $100 million to settle charges of bilking and misleading students – and Fischer's Citi stint looks like a charity

Might we remind you, Milken is just a pardon away.

You know it, we know it and he knows it: This year’s Jackson Hole gathering of central-banking types was a bore. A snooze. A yawn. Sure, Janet Yellen probably sounded too pro-regulation to stave off the inevitable Gary Cohn Fed chairmanship—pending, of course, another pro-anti-Semite outburst on the part of his chief, although that might not even be a dealbreaker—but she wasn’t giving one drop of useful information to anyone other than tea-leaf-reading bond traders. This was a good thing, because whatever they do, the eventual collapse won’t be there fault, according to Allianz’s Mohamed El-Erian.

Chair Yellen and President Draghi had good reasons to disappoint the many eager for policy insights. The Fed is well embarked on a “beautiful normalisation” (borrowing a concept used a few years ago in a different context by Ray Dalio, the founder of hedge fund Bridgewater). Without derailing growth or destabilising markets, it halted QE, raised rates three times, and signalled its intention to contract its balance sheet…. When it comes to global feedback loops, neither they nor Governor Kuroda are in a position as yet to opine with sufficient authority on the prospects for simultaneous normalisation, especially given uncertainties about productivity, wage formation and the political enabling environment for the much-needed policy transition away from excessive reliance on central banks….

Last week’s symposium left lots of open questions for markets that, given very profitable adaptive expectations, are now deeply conditioned to rely on central banks to boost asset prices, repress financial volatility, and influence asset class correlations in a manner that rewards investors and traders even more…. Over the longer-term, however, it heightens the risk of possible collateral damage to the economy from artificially elevated asset prices, particularly if political conditions continue to delay much-needed pro-growth measures.

Yellen and Draghi had good reason for Jackson Hole reticence [FT]
Trump Gets Yellow Light From Yellen on Bank Deregulation [WSJ]
Treasurys Strengthen as Fed’s Yellen Addresses Regulations, Not Interest Rates [WSJ]

"Fed Chair Janet Yellen’s passionate defence of the post-crisis tightening of financial regulation isn’t going to go down particularly well at the White House," wrote Paul Ashworth, economist at Capital Economics, in a research note following the speech. "Donald Trump has made rolling back regulation the centre-piece of his presidency."

This assumption derives from the fact that Yellen used her address to celebrate a set of post-crisis rules that, according to Donald Trump and his subordinates Gary Cohn and Jamie Dimon, have made banks blacklist small businesses and kneecap the American economy. So by offering a fist-pumping vindication of capital buffers and stress tests, this thinking goes, Yellen essentially told the Fed chair search committee to inquire elsewhere. As Pedro da Costa concludes:

It's not a message the Trump team is likely to heed, but it's certainly one that cements Yellen's own personal exit strategy.

But there's reason to be skeptical that Yellen just gave her swan song. It's not like her views on prudential regulation were a mystery before. And even in a speech largely supportive of the Dodd-Frank regime, she threw out a few deregulatory bones. On liquidity, for instance:

While no single factor appears to be the predominant cause of the evolution of market liquidity, some regulations may be affecting market liquidity somewhat. There may be benefits to simplifying aspects of the Volcker rule, which limits proprietary trading by banking firms, and to reviewing the interaction of the enhanced supplementary leverage ratio with risk-based capital requirements.

And on mortgage availability:

Currently, many factors are likely affecting mortgage lending, including changes in market perceptions of the risk associated with mortgage lending; changes in practices at the government-sponsored enterprises and the Federal Housing Administration; changes in technology that may be contributing to entry by nonbank lenders; changes in consumer protection regulations; and, perhaps to a limited degree, changes in capital and liquidity regulations within the banking sector.

Beyond making Goldman very happy, Yellen's openness to tinkering with Volcker and capital rules aligns with whatever it is, if anything, Cohn means with his New Modern Twenty-First Century Glass-Steagall. These issues are at the top of the regulatory reform checklist for both the administration and the bank lobby. And since Congress is unlikely to expend the effort needed for a total finreg overhaul, the reforms we'll actually end up seeing will probably hem more closely to Yellen's cautious approach than the “dismantle-Dodd-Frank” promise of candidate Trump.

Thus there's been some pushback to the Yellen-retirement story. Here's Carl Tannenbaum, chief economist at Northern Trust:

“I’ve seen odds that there is only a 25% chance she is reappointed. If I had a nickel I might take a punt she stays,” he said. Yellen is a “known quantity” and represents some level of stability in Washington, he said.

So there. Yellen leaves us where we started. Another J-Yell classic.

After raising interest rates at their last meeting, expect a very quiet statement from Janet Yellen and the rest of the Federal Reserve at their policy meeting this week.

A rate hike was always off the table at this meeting anyway, but a run of frustrating data since that rate hike will almost certainly make it hard to muster a consensus for even hinting at further tightening for the time being. That probably includes moving forward in any fashion with their aspirations to begin unwinding the central bank's massive $4 trillion balance sheet -- or even outlining when they foresee moving ahead with that momentous move.

The trends in the Fed's key mandate data have been clear throughout the summer: incremental improvements in the labor market, along with an inflation rate that has been sinking lower and continues to fall well short of the Fed's long-run target. This is a somewhat puzzling dynamic for policymakers, and one that is likely to make agreement on the appropriate moves going forward more difficult to generate than for the rate hikes earlier this year.

Below those headlines figures, though, have been a range of other readings that will put the Fed in wait-and-see mode, or sabotage their efforts to tighten policy. Wage growth remains sluggish, which is probably contributing to the lack of inflation, and productivity growth during the expansion has been, essentially, the worst in the post-war era and shows little sign of sustained improvement.

Another shoe dropped after Yellen's most recent Congressional testimony, when data showed that retail sales slid for the second straight month, dipping 0.2% when economists had projected a 0.1% gain. Those declines came even though Yellen attributed the slower rate of inflation to a range of consumer items, which along with incremental improvements in the job market, theoretically should have firmed up the consumer market during the intervening period.

There are additional reasons for Yellen and other Fed officials to keep their fingers firmly on the pause button until the early autumn, if not into the winter -- though a key one falls under the central banking as art, not science, category. Historically, September and October are perilous months for markets, when the days begin to grow short and the problems that have built up in the economy are easier to see without the glare of the summer sun and the Hamptons hangover.

The current bull market has run for more than nine years, pushing markets to new highs and turning every piece of supposedly worrisome news into a catalyst to reaching new peaks -- a fact which seems to be giving some Fed officials jitters. They engaged in a bit of coordinated warning on rising asset prices and risk appetite last month, with Yellen herself calling them "rich" and San Fran Fed President John Williams arguing the stock market was "running on fumes."

In the moderate parlance of central banking, those comments are like a "WTTTFFF" text to the markets. While the Fed traditionally would move to tighten policy further if they sensed financial conditions had become loose, their current mandate conundrum has tied their hands; they'll be doubly reluctant to move on rates until they're sure that the frothy markets somewhat reflect the state of the economy and won't introduce a whole new set of headaches for them in the back half of the year.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

The first bombshell dropped when the leaky boat that is the current White House let it slip that rising Trumpista and former Goldman Sachs president Gary Cohn is the leading favorite to replace Yellen atop the Fed. Plenty could happen before the time comes to decide on Yellen's fate, but this is not a surprising development: Yellen is an even-handed, left-of-center technocrat, while our current president fetishizes Wall Street experience and places a premium on the type of fealty that Cohn has already demonstrated.

It's not just that her replacement is lurking (so much as Gary is physically capable of "lurking") in the headlines, though, it's also that she's slowly being surrounded by central bankers with different loyalties and agendas than hers. And it doesn't really help that the confusing jumble of economic data we've seen in 2017 leaves her and the rest of the Fed with little clarity about the medium-run outlook for the economy and a rather unpalatable policy knot to untangle.

But mostly it's that she had to talk to Congress about all of this during her twice-annual trek to Capitol Hill for discussions about monetary policy and whatever else the Capitol's adult day care House of Representatives wants to talk about.

These "chats" have developed a predictable rhythm in recent years: first Janet heads to the House and is greeted by Rep. Jeb Hensarling, forcing her to live out every New Yorker's nightmare of listening to a self-righteous lecture from an effete Texa for five minutes. Then a right winger whose main claim to fame is that he was the most conspicuously drunk man in Boston for a year in the 90s -- Rep. Sean Duffy -- shows her what it's like when he stops being collegial about his politicallty grandiose (and logically odd) requests for information and starts getting real. The next day, she heads to the Senate, where Sen. Elizabeth Warren plays her role as chief financial crusader of the left with Yellen as her symbolic foil.

While these circus appearances are surely unpleasant for Yellen, the headlines they generate have overshadowed developments that reveal deeper pressures building up for her at the bank. Adding those pressures to the rumors about Cohn, and we may soon be looking back on this as the beginning of the end of her chairmanship. Perhaps the strongest sign of this impending doom was news that the Trump administration had finally nominated Randal Quarles as the Vice Chair for Supervision, a Fed board position created by the Dodd-Frank Act and a move that had been rumored for months. His nomination is significant because from this post he can begin the Republican project of rolling back or altering the enforcement of many of the oversight rules that have been put in place during Yellen's chairmanship.

He also represents an ongoing shift away from academic economists or officials who rose through the ranks of the central bank (like Yellen did) occupying its top positions. Quarles has a notable background serving in the U.S. Treasury but is also a creature of the private equity world and there is little doubt that he will approach problems of policy with a focus on economic "growth" -- which in central bank terms means giving the financial sector what it wants.

The other major headache for Yellen is the deepening of the sort of reverse stagflation situation policymakers are currently confronting. Jobs numbers from last month showing a still improving labor market (a slight increase in the headline unemployment driven by workers "coming back" to the labor market -- economics!) amid flagging inflation, and suddenly Yellen and other Fed officials are hinting that they may begin tapping the brakes on their interest-rate hiking efforts as they look for clearer data signals. While this would indeed be a cautious and wise approach, the truth is that this current dynamic is one for which our current and woefully poor economic paradigm and models have little explanation, and therefore little to offer in the way of finding the correct policy approach.

Even the financial market response to these hints from the Fed signaled that there is something fundamentally unclear about the economy: equity investors saw a "risk on" green light and pushed up stocks, while bond investors poured money into the safe haven of U.S. Treasuries. The only silver lining for Yellen is that it by the time one half of the financial world finds out it is has bet wrong, it may no longer be her problem.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

Poor Janet Yellen: The Federal Reserve chair had a date with the House Financial Services Committee this morning, and amidst her preparations apparently missed the news that she’d already been replaced. And so she dutifully trudged up to Capitol Hill with her own personal dual mandate intact: Give our legislators an update on the economy, and continue to impress upon President Trump that she’s the low-rates gal for him.

She repeated her view that an increasingly tight labor market would put upward pressure on wages and prices, but added, “We’re watching this very closely and stand ready to adjust our policy if it appears that the inflation undershoot will be persistent.”

You hear that, Don? Just have Gary explain to you that what I mean by “adjust our policy” is, no more rate increases. Oh, you’re busy dealing with your idiot son? And Gary’s decided, in his role as host of “The Apprentice: Fed Chair” that Gary himself is the man for the job? OK, then. I’ll start preparing that massive rate increase for later this month.

Yellen: Inflation Should Rebound, but Fed Could Alter Policy if Softness Persists [WSJ]

In a key milestone for systemically important banks, the Fed approved every bank's capital plans and approved capital payouts for the group as a whole that were about equal to their earnings -- meaning that, for the first time since the financial crisis, banks will be paying shareholders back everything they earn, and no longer setting capital aside. This move to loosen the restrictions on the regulatory front comes at a time when a number of top Fed officials are growing increasingly worried about an overheating financial system and the potential for a sharp reversal in the slow-but-steady growth of the U.S. economy this decade.

According to the the just-released minutes of the Federal Open Market Committee's last meeting, Chair Janet Yellen and her cohorts spent much of their last meeting discussing why, exactly, investors have responded to the Fed's interest rate hikes by pushing stocks and other risky markets to all-time highs. (They've taken away the punch bowl only to find that the party-goers brought their own flasks ).

Even Capital One, which was asked to resubmit its capital plan, was given a tacit go-ahead despite the Fed citing weaknesses in its planning (and its exposures to automobile loans and its massive credit card business, which also happen to be two of the credit areas flashing the brightest warnings lights of growing stress).

The stress test and capital results followed comments to a Congressional panel from the new unofficial regulatory czar, Governor Jerome Powell, which indicated that the Fed is beginning a broad review of the regulatory framework it has instituted since the financial crisis and the passage of Dodd-Frank. Powell said the Fed is considering placing its living will plans on a two-year cycle. He also said the Fed is pushing the other regulators to revisit the Volcker Rule, and suggested Congress may want to do the same, and hinted that the Fed might eliminate the qualitative objection of its CCAR tests, which would effectively hamstring bank regulators from raising really any non-quantitative red flags during the process.

Finally, Powell said that the Fed will reconsider how it determines the appropriate levels of its supplementary leverage ratio, a risk-based measure of capital which could have a significant impact on how banks define the riskiness of their balance sheet and, ultimately, how high they can push their own leverage.

The sharp change in tone and permissiveness of the capital returns underscores the extent to which Republican control of the oversight machinery is likely to usher in an era of deregulation -- perhaps even to the extent that occurred in the late 90s and early Aughts in the run-up to the financial collapse of 2008. It's not hard to imagine President Trump or someone in his administration catching wind of this picture from 2003 in which a group of banking overseers cut through banking regulations and pondering whether Steve Mnuchin can pull of wielding a buzzsaw.

And it is no accident that the softened stance on Volcker and CCAR testing comes on the heels of the departure of former Fed Governor and supervision czar Daniel Tarullo, who, as was obvious by their seething and barely contained hatred of him, neither a product nor a tool of the money-center banks. (Unlike Powell, a veteran of the George W. Bush administration and the finance world, as well as Vice Chair Stanley Fischer, a Citigroup veteran who downplayed essentially every potential risk to the financial system and economy in a speech last week).

In fact, it's hard to truly understate how much the banking industry held Tarullo in utter contempt and blamed him for much of the regulatory crucifixion (through no fault of their own!) to which they claimed they were being subjected. Judging by how quickly they've made gains on some of their most belly-aching complaints in since he left, perhaps they were right to view him as the villain standing between them and once again engaging in barely-fettered capitalist lending.

Allowing the banks to dole out capital in excess of their earnings power, and rolling back the strictures put in place since the financial crisis, is also a far cry from the plans advocated by those outside the halls of the Federal Reserve Board's Washington hallways.

Minneapolis Fed President (and Dealbreaker Favorite) Neel Kashkari, for example, has suggested that the still too-big-to-fail banks be treated like nuclear power plants. Even the influential GOPer Rep. Jeb Hensarling, chair of the House's Financial Services Committee, has advanced legislation for overhauling financial regulations which would simplify the morass of regulatory rules for big banks but also require them to carry far greater levels of capital.

These efforts appear to be policy footnotes to a much different agenda for now, however -- as they will remain historical footnotes whenever the ascendant deregulatory agenda reaps the inevitable financial calamity Fed officials have bowed to sowing.

The Fed has been singing the same tune on inflation for nearly the entirety of this decade, and one could be forgiven for wondering how much inflation is really playing into the Fed's decision-making process at this point. Fed Chair Janet Yellen and co. made the move to lift rates to between 1% and 1.25% even though most inflation readings - including its favored core inflation statistic - have drifted away from its long-run target of 2% in recent months. Instead, it seems that a marginally improved labor market, and a desire for more wiggle room to cut rates for a slowdown that is becoming increasingly mathematically inevitable, are motivating the push to tighten policy. That includes the Fed's outline for reducing its balance sheet, the manner of which but not the timing, was unveiled alongside the rate hike.

In her press conference following the FOMC announcement, Yellen said that a price level decline in March and slowdown in recent months were mostly attributable to one-time declines in certain goods such as wireless phone services and prescription drugs. "These price declines will as a matter of arithmetic, restrain the 12-month inflation figures until the extraordinarily low March reading drops out of the calculation," Yellen said last week (also declining to note that these price declines will most benefit and boost the short term spending power of exactly the type of consumer who has mostly been left out of the long but tepid recovery the Fed bought with its zero-rate policy and asset purchases). Nevertheless, she said that the Fed continues to believe that a robust labor market will drive level of overall prices higher toward its 2% target. New York Fed chief and loyal Yellenite William Dudley backed her statements earlier this week, arguing that improving jobs markets and wages would push inflation to the Fed's goal.

Already, though, it appears doubt is creeping in among some Fed officials' policy-tightening faith. Chicago Fed President Charles Evans toed far from the party line earlier this week saying the Fed should wait until the end of the year to consider lifting interest rates again. Though not a voting member this year, it's hard not to think his view is one that will grow among other Fed influencers if inflation readings continue to slide away from the 2% target.

Minneapolis Fed President Neel Kashkari, who dissented on the rate hike is quickly turning into the late Yellen-era Fed's top central banking heel, hinted in an interview that such a dynamic is indeed taking shape at the Fed. Other policymakers share his views, Kashkari said, but they haven't displayed the same cojones in pushing back on rates. "Maybe people aren't ready to take action yet," Kashkari said, though it's clear he's ready to give voice to the opposition if and when inflation drives a wedge in the FOMC.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

As with any good reality show, there are a range of competitors. There are the kind of right-leaning economists you might expect a normal Republican president to favor. There’s the longshot Minnesota school of Neel Kashkari and Narayana Kocherlakota battling over who can offer the most accommodative possible monetary policy to MAGA. There’s Gary Cohn himself, obviously. And then there’s the incumbent, who has apparently been rising in the president’s esteem.

Well, it was never really likely that Trump would renominate such an Obama stooge, but there’s even less chance of that happening now.

Fed officials said they would increase their benchmark federal-funds rate on Thursday by a quarter percentage point to a range between 1% and 1.25% and penciled in one more increase later this year if the economy performs in line with their forecast.

Officials also revealed plans for winding down their holdings of Treasury and mortgage securities.

The damage to Yellen’s candidacy can’t quite be gauged yet, since the president apparently has not yet had a 128-character thought about this afternoon’s rise. But we’re going to go ahead and guess that Yellen’s next rate increase will be her last.

“The plan is one that is conscientiously intended to avoid creating market strains and to allow the market to adjust to a very gradual and predictable plan,” Ms. Yellen said at a news conference on Wednesday.

Predictable plan? We can’t think of a single thing that’s more anathema to the current occupant of 1600 Pennsylvania Avenue.

Fed Raises Rates, Sets Out Plan to Shrink Asset Holdings Beginning This Year [WSJ]

Upon his election, Trump realized (or was told) that the low interest rate environment he had decried as a covert scheme on the part of Yellen & co. to elect Hillary Clinton didn’t look so bad from within the Oval Office. In fact, there was suddenly a lot to like about the fellow New Yorker of a certain age sitting atop the nation’s fiscal policy apparatus. Plus Gary Cohn seems to like her, and that carries a good deal of weight. Sure, Janet Yellen may not be a person of Putinesque quality but there is at least a little bit of D.J.T. in her, according to the latest in Trump’s series of awkward, winking attempts at ingratiation with and intimidation of underlings.

Weeks after his inauguration, President Trump held court with Fed Chairwoman Janet Yellen in the Oval Office. Seated behind the office’s Resolute desk, he told her she was doing a good job, according to people familiar with the exchange.

Ms. Yellen sat across from Mr. Trump in a chair next to Gary Cohn, Mr. Trump’s chief economic adviser, who has emerged as the key intermediary in the unfolding relationship with the Fed.

The president told Ms. Yellen he considered her, like himself, a “low-interest-rate” person.

Beneath the Uneasy Peace Between Donald Trump and Janet Yellen [WSJ]

To say that the race for the Federal Reserve chairmanship is wide open would be an understatement. Among the many taboos President Trump broke during his campaign was to repeatedly attack incumbent Janet Yellen for keeping interest rates artificially low and thereby mask the American carnage rampant under President Obama. However, as an incumbent himself now, Trump has come around to the idea of a Fed chair who keeps rates low enough to make Trump’s economic growth pipe dreams slightly more remotely possible. Then there’s Trump’s top economic adviser, Gary Cohn. His protestations to the contrary aside, reports are that the former Goldman president is looking for an exit from the sinking ship that is the Trump White House.

Keefe Bruyette & Woods is handicapping the race, and sees five favorites at the moment. In addition to Yellen and Cohn, the investment bank thinks Trump might go with Fed alum Kevin Warsh or Stanford professor John Taylor. Or maybe Neel Kashkari.

“Neel Kashkari!” you say. Yes, Neel Kashkari, whose fiscal policy experience extends back to—last February, when he became both president of the Federal Reserve Bank of Minneapolis and Dealbreaker’s favorite regional Fed chief.

“But,” you continue, “it can’t be Kashkari! He ran the hated bailout! And he likes Dodd-Frank! And wants to break up the big banks! And he’s been mean to Gary Cohn! He’s basically a younger, hairless, Kashmiri Bernie Sanders!”

All true. But he’s also got a few qualities that President Trump may find appealing. First, he’s a Republican. A California Republican, to be sure, but a Republican all the same. Second, he does want to pare down some banking regulations, just not for the big banks Trump likes to kick (another of Neel’s hobbies!) and hire from. Speaking of which, he’s a Goldman alum and formerly worked at PIMCO, which means he’s used to dealing with unstable bosses. Like the president, he loves Twitter and speaking out of turn. He’s an outsider—a non-economist doing an economist’s job. Perhaps most importantly, he’s more likely than even Yellen herself to keep rates down and Trumponomics from blowing up.

Mr. Kashkari’s dovishness may indeed make him attractive to the Trump administration, especially if its policies push up deficits that would be easier to deal with by way of Fed-engineered low rates….

Mr. Kashkari is also relatively young and ambitious–he ran for governor as a Republican in California and once led a key Treasury bailout program–and he is an able public speaker. That could appeal to the president.

Minneapolis Fed’s Kashkari Makes KBW’s List of Fed Chair Contenders [WSJ]
Gary Cohn Says He Isn’t Interested in Fed Chair Job [Bloomberg]

Long story short: the thing probably isn’t going anywhere anytime soon.

Chair Janet Yellen and other top officials have claimed for some time that they are eager to begin reducing their nearly $4 trillion in U.S. government and mortgage debt. And while this may be true at the margin, there is plenty of reason to believe that a balance sheet of a size that would have been unthinkable before the financial crisis will be with the Fed well after many current FedHeads have left the bank.

The truth is that though many of them may make noises about reducing the size of the balance sheet, a sizable and probably a majority of Fed officials believe that the monstrosity of U.S. government and mortgage debt is here to stay — indeed, most of them schooled in the modern central banking theories believe a rather large balance sheet is now an essential part of monetary policy (as usual, the cool kids in Tokyo have been at the leading edge of this trend since the 90s.) More than one Fed official has indicated that even a “normal” balance sheet as they currently envision it could total about $2 trillion worth of government and/or housing debt.

Holding a sizable balance sheet gives Janet Yellen & Co. a variety of policy options as they aim to dilute the economic punch bowl over the coming year or two, and an additional lever to old-fashioned, ho-hum interest rates certainly proved useful when their goal was to boost the economy after the Aughts Collapse.

And Fed policymakers have real trepidation about reducing the balance sheet, even from its current level. No one - really - has any actual idea about how big of an impact such a move would have on the economy. The Fed has been operating in uncharted waters since it first embarked on its asset buying campaign, and there is no uniform understanding if hundred of billions of dollars pouring off their balance sheet will actually be a “background event” for financial markets.

So they will move with caution — even more than they’re currently broadcasting — for fear of accidentally tightening financial conditions beyond where they hoped. Additionally, any hints of a slowdown or a (mathematically overdue) recession would almost certainly mean shelving any sort of major reduction in their asset holdings. Unless the entire developed world economy suddenly emerges from the deflationary pressures of the last decade, the financial considerations at play still ultimately point to the Fed remaining the owner of trillions upon trillions of U.S. financial assets.

However, there is one major risk related to the balance sheet that may be compelling enough for the Fed to show major progress toward moving away from a balance sheet dependent policy approach: politics. Quantitative easing has proved a fruitful vector for the resurgent populist movements on both sides of the American political aisle, as anyone who has ever watched Rep. Sean “Real World” Duffy stop getting nice and start getting real in a monetary policy hearing can tell you.

The real nightmare scenario for the bank, though, is that an economic crash leaves large losses sitting on its balance sheet and dries up the annual payments it makes to the U.S. Treasury each year. We’ll find out soon enough if the bank is more worried about inducing an economic crash, or holding the political bag if one occurs and offering its political opponents a real chance to seriously rein in its uniform control over monetary policy.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.

President Donald Trump has mostly spared the Federal Reserve from the tumult he has inflicted on other institutions in Washington during the early days of his presidency.

He did dip his toes into central banking policy last month though, telling the WSJ in an interview that now that he's president and can be honest, he actually prefers low interest rates. And, oh yeah, he mentioned, he is also willing to consider re-appointing Fed Chair Janet Yellen when her term is up in 2018. Trump’s sudden evolution to favoring low rates after attacking them on the campaign should not be surprising, nor should the possibility of a re-appointment for Yellen if she follows her dovish policy instincts in the coming year and a half.

No president with majorities in Congress would want to see rates rising as midterm elections neared — not to mention before his own re-election campaign down the line. Few things endanger incumbents like the economic slowdowns that invariably follow rate hikes.

This sort of public politicking by Trump will certainly lead to alarm among Fed officials and non-Zero Hedge contributing economists who preach the importance of policy independence, but presidents always seek to influence the Fed. It does seem likely, though, that Trump will do so with little regard for the traditional norms and decorum that have limited direct policy meddling in the past.

This would take him down a similar path to Richard Nixon, whose administration seems to be emerging as the easiest (laziest) historical precedent for Trump’s - and not just because of the impetuous, fulminating men at their centers. Nixon was keenly aware of how rising interest rates can impact the ballot box, and always blamed his close election loss to John F. Kennedy (amen) in part on a cycle of interest rate tightening that triggered a recession in the first few months of 1960.

As a result, he left little to chance at the Fed when he became president, installing GOP loyalist Arthur Burns as its chair and then subjecting Burns to his full range of fulmination, micro-managing and threatening to keep rates low ahead of his re-election campaign. The central banking policy tensions of Nixon’s times parallel those of the Fed today, as well, with Fed officials deciding between nurturing a growing - if unspectacular - economy, or giving way to worries that money is too easy and liquidity needs to be pulled from the financial system.

Nixon, as his White Hose tapes reveal, considered that liquidity problem to be “just bullshit.” Absent inflation showing up at the gas pump or in the food aisles, Trump will agree.

And there is more than the purely political calculus to consider.

Like so many of his countrymen, Trump is a real estate addict at heart and one day (hopefully soon, for all of our sake) will be able to capitalize on his Chiefdom in hard assets and big deals during his post-presidency. Now that the Goldman guys will take his calls, turning off the easy money spigot any time soon probably sounds like a bad idea to the President.

Robb Soukup is a freelance journalist who previously covered the banking sector and The Fed for S&P Global Market Intelligence.