Jerome Powell Is Taking A Learning-By-Doing Approach To Becoming An Expert Bullshitter

The new guy is getting the hang of this.
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Ok, well judging by what we heard on Thursday from new Fed Chair (and man who is regretting it already) Jerome Powell, he's learned a thing or two about how to obfuscate since Tuesday.

Jay Powell

As a reminder, he made the "mistake" of giving a straightforward (by central banker standards) answer to a straightforward question earlier this week and when you're Fed chair, that's just not what you do - especially when the question is about the possibility of hiking more times than the market expects.

That led to a spike in yields on Tuesday and if you've been paying attention lately, you know that equities are taking their cues directly from bonds (and more specifically from real yields). Mercifully, that spike had faded by Thursday when Powell was back on Capitol Hill to deliver a second round of testimony to the Senate.

Today, ol' Jay demonstrated he's not completely incapable of employing doublespeak. For one thing, he said “there's no evidence the economy is currently overheating” and he also seemed to take a page out of the Mnuchin playbook (which in most cases would be a bad idea, but it worked here) when he suggested it's possible to see further strength in the labor market without a dramatic read through for inflation on the whole.

Contrast that with what he said on Tuesday when he clearly suggested the economy is accelerating and explicitly stated that inflation is moving up to target.

All of this is fucking tedious and also boring, but unfortunately, it's critical at the current juncture. As we learned last month (and on Tuesday), "it's all fun and games" when it comes to inflation and rate rise "until someone gets hurt", where "hurt" means the stock-bond return correlation flips positive and everything sells off at once.

Of course by virtue of being more nuanced, Powell's Thursday remarks were more amenable to interpretation (and indeed that's the point). For his part, Bill Gross heard "Fed put is dead" and he also heard a Fed Chair who doesn't understand structural headwinds to inflation. To wit, from the Janus Twitter feed:


Fair points, but this is the same Bill Gross who called for a bond bear market just last month.

It's also worth comparing Gross's comments to what we got from Paul Tudor Jones, who told Goldman's Allison Nathan the following in an interview published on Wednesday. Asked if, because "inflation expectations have been very well anchored," history is now "less useful a guide", he said this:

No. I think we’re experiencing a hysteresis effect in global groupthink, led by the Fed, believing that we can depress term and risk premia without consequences for inflation or financial stability. That may have been the case for the past six to seven years. When it comes to inflation, you need to be careful what you wish for. At the end of other big asset price booms—Japan in 1989 or the US in 1999—inflation did not increase in a measured way. Rather, it accelerated in a non-linear fashion until the central bank had to come in and stop it with substantially higher real rates than we have today.

Which brings us right back to what's been driving stocks lately - real rates, which are now positively correlated with the VIX.

So who knows? Certainly not Jerome Powell. And see that's why mastering the art of obfuscation is so critical for the head of the world's most powerful central bank.

As the old saying goes, "it is better to keep your mouth closed and let people think you are a fool than to open it and remove all doubt." The problem is that in the post-crisis world, characterized as it is by the necessity of preserving the two-communication loop between policymakers and markets, "keeping your mouth closed" isn't an option.

The next best thing is learning how to be deterministic and vague at the same time. That's a paradox, but it's one that a "good" central banker has to master.