Arthur Burns or Paul Volcker? Surprise or Unexpected?

Is Powell an Arthur Burns or a Paul Volcker? Were Powell’s comments last night a surprise or an unexpected event?

What do I mean by ‘surprise and unexpected events? See “Expected, Unexpected and Surprise Events.”

What about my allusion to Burns and Volcker? An explanation here needs to go back in time – to when I first took trading seriously.  The memories are mine. Some of the ideas here taken from my trading journal.

Nixon appointed Burns to the Fed Chair. “Nixon says jump! Burns says, ‘How high?”.

Carter appointed Volcker, and Regan reappointed him. At the time of his appointment, US inflation was threatening to go hyper. Despite untold political pressure from both Congress and the Presidency, Volcker took the action needed to curb inflation. His policies lay the foundation for the growth in the US economy from the 1980s to 2000’s.

The question facing traders now: Is Powell aligned to Burns to Volcker?

The query comes up because in October, he said:

“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.”

Last night, he said:

“Interest rates are still accommodative, but we’re gradually moving to a place where they will be neutral,” he added. “We may go past neutral, but we’re a long way from neutral at this point, probably.”

“Our gradual pace of raising interest rates has been an exercise in balancing risks.”

But reading the full texts, what I see are two different standards:

• in October,  he was referring to the average (3%). The current rate is 2.25%, a few quarter point hikes away.
• last night he seemed to be speaking about the range where the low of the range is 2.5%.

In my view, there was nothing in the speech that suggested a shift. That’s not how the markets took it. The reaction of the indices and USD was that Powell had given in Trump’s demands and was signalling a halt in the rate rise.

My reading of Powell, is he is more aligned to Volcker than he is to Burns.

He’ll do what he believes to be the ‘right’ thing for the US economy. So far he has made it clear that the data says further rate rises are necessary. If my assessment is correct, we’ll know by Dec 19.  Dec 14 will be FOMC – we should again see better than expected employment numbers. Should those come in, the FED comments will tell us whether we have a Burns or a Volcker.

The question is not an academic one.

If Powell sticks to raising rates, the markets’ misreading of his intent will send the stock indices down, the USD up.  In such a situation, I’ll view the speech as a surprise event. If my view turns out to be incorrect, then the low for the indices is probably in. The Dec seasonals will be free to take hold – we should see the indices head North. The speech was an unexpected event.

Let’s see what happens.