So, we have Jay Powell giving a talk this afternoon at the Economic Club Of Chicago.
The market was "enthused" by the recent more dovish comments from Governor Waller and hopeful that Jay might repeat the same "narrative" this afternoon.
I think that is highly unlikely.
Why?
In his last speech Jay took a decidedly more hawkish tone on the issue of tariffs suggesting there was a danger that the inflation effect could be more sustained. This was raising the bar on his prior statements which were more of the view that it might be "Transitory"
Jay and "The Donald" are in a similar situation these days. They are both in their final terms and how you approach things in your final term can be different. From Trump's perspective that is following the path he laid out without worrying about the political consequences and funnily enough from Jay's perspective he can take the same approach.
As a consequence, he clearly sees the Trump agenda as also one that is trying to force the Fed to "bend the knee" and cut in a scenario similar to his tariff aims with countries around the World.
In Jay's mind I do not think he sees an upside in that. He does not, above all else want to go out on a note that he turned "soft on inflation" in the home straight and would prefer to leave that choice to his successor. In his mind he also preserves his independence and integrity in that respect.
I am not convinced that he is correct in his inflation expectations and have written on a number of occasions that I think ultimately Tit for Tat tariffs in a slowing global economy creates uncertainty, rising unemployment and a more deflationary environment. Pair this with a US consumer that is pretty much tapped out and I think there is a high probability that businesses will struggle to pass on price hikes and will have to absorb those costs in profit margins.
Turning to Governor Waller, he is in a different place. He has long been considered an heir apparent to Jay and now is the time to show your "credentials" in that respect. Those credentials clearly need to be more dovish than the recent position from Jay and will likely continue to be so.
As a consequence, I think we have a perfect storm for these two heavyweights to diverge, not converge. I think Waller will continue to articulate a more dovish interpretation of tariffs while I think Jay has "set his store" and unless it is clear and obvious that things are breaking, he is going to hold the recent line he took.
The gentleman is not for turning at this point.
