Good analysis24 Nov 2021 11:25
The “safe” choice for Fed boss still rattled markets
At the start of this week, US president Joe Biden made the decision to keep Jerome Powell as the head of the Federal Reserve – America’s central bank – for the next four years. This appears to have rattled markets into believing that interest rates are going to go up faster than they’d thought.
Why’s that? It’s not entirely clear, but I have a view that I’m happy to share with you: this isn’t so much about Powell as about Biden and the overall direction of travel.
You see, some people thought that Biden was going to drop Powell (who votes Republican, apparently) for Lael Brainard, who is also on the Fed. Brainard is seen as being more “dovish” than Powell. In a narrow sense – in terms of her voting record – it’s not clear that this is true. However, she has certainly talked more about the likes of yield curve control and other “innovative” central bank policies.
So unless you want to be really pedantic, you could certainly argue that a shift to Brainard would have been evidence that a) Biden was confident of getting his own way and (arguably) b) that monetary policy would probably err on the “dovish” side.
So while Powell getting the job again makes sense in lots of ways – markets tend to be even more jittery around a new Fed boss – it also implied that monetary policy isn’t going to be as free and easy as it might have been.
I’m not sure this makes sense (I suspect Powell will err on the “dovish” side as well) but markets are all about expectations, and they were expecting someone even more inclined to print money at the drop of a hat. They didn’t get that, so they started betting that interest rates will go higher.
As a result, stuff that doesn’t like higher interest rates – gold, interest-rate sensitive growth stocks that don’t make much by way of profits – sold off, while the US dollar headed higher.
One of the most obvious casualties so far has been the Turkish lira. The lira has been in a long-term downtrend for over a decade now. But yesterday things became extreme: the currency lost more than 15% of its value against the dollar in a single day.
That’s more like the sort of move you’d expect in a cryptocurrency, and indeed the ZeroHedge blog is now referring to the lira as “erdocoin”.
Now, Turkey is almost uniquely badly governed, and has been for sufficiently long enough to allay fears of any systemic exposure. So this isn’t necessarily symptomatic of a wider emerging-market problem. But it does demonstrate what happens to the most fragile assets when rates even hint at moving.
Central banks are in a really tight spot
I think what you should take from all this is not so much that interest rates are going to rise sharply, but that the world really isn’t in much of a state to cope with sharply higher rates.
Central banks, and the Fed in particular, know this, and are caught in a very difficult position. Put bluntly, the world is carrying too much debt to be
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