By Michael Every of Rabobank

Yesterday’s strong headline US retail sales print, and an uptick in the NAHB home builders index, were further arguments for the Fed to keep hiking. Stocks may have risen on another short squeeze, hedge fund re-risking, or the underlying view that the better things get, the more the Fed hikes, and then the more the Fed has to cut – but they rose. Yet so did Treasury yields, which leaped around 10bp across the curve before 2s ended +2bp at 4.63%, 5s +4bp at 4.04%, 10s +7bp at 3.81%.

While the housing survey is ‘real’, retail sales gains were not. Yes, headline spending was up 3.0% m-o-m, and bars and restaurants spending up 7.2%: but does the latter say belts are being loosened, or that we are trying to stay drunk to get through this inflation? Indeed, inflation alone lifted retail sales values. You aren’t spending 20% more in real terms if your drink just cost you 20% more. (And it will likely soon cost more again if the IRS start looking at wait-staff tips.) The lines between fiction and reality are too easily blurred by too much money spent in bars.

And on blurred lines, Vice-Chair Brainard --an MMT-adjacent and digital-dollar backing dove-- just left her next-in-line position at the world’s most powerful central bank to become the eminence grise at the less-eminent National Economic Council (NEC) that advises the president. That seems an odd career move when Fed Chair Powell may not be around forever. Rumours are now the White House will propose Chicago Fed President Austan Goolsbee to replace Brainard. He only joined the Fed on January 9 this year(!) and served as chairman of President Obama’s Council of Economic Advisers (CEA) from 2009-2011 in his cabinet. This appointment would therefore continue the trend towards more political choices at the Fed, and the blurring of the lines between the Fed, with a Vice-Chair who chaired the CEA, and Treasury, led by former Fed Chair Yellen, and the White House, advised by former Fed Vice-Chair Brainard.

Before anyone shares the internet meme of the guy ranting at a board with photos, strings and pins in it, this is just an observation of fact. It could all just be an incredible coincidence, or reflect a shallow gene-pool for talent. However, how would you react if you saw this unfold in an emerging market? The longer run implications for what this might also mean for fiscal and monetary policy, and the risks of blurred lines between them, is still in ranting-at-boards-with-photos-strings-and-pins territory. For now. (But as I walk away from it, I can’t resist a last Tourette’s-like “Rate hikes and QE!”)

Nearer term, Goolsbee is already in the Fed - for five minutes. He has had regular media presence in the past, and in his own words, in past economic roles "was probably best as a policy explainer." That would be useful, but what might he be explaining?

He does have a good economics mind. Indeed, he has recently done some interesting NBER work on productivity in the US construction sector, arguing “Aggregate data show a large and decades-long decline in construction sector productivity. This decline in such a large sector has had a material effect on secular productivity growth for the economy as a whole,” and yet not concluding ‘because markets’ but rather that, “States with more productive construction sectors do not see growth in their shares of total US construction activity; if anything, their shares fall.” In other words, things are complicated and structural.

He also has a political mind, and was involved in ‘NAFTA-gate’ in 2008, where the allegation was he conveyed a private message to Canada that President Obama’s public criticism of NAFTA was to be ignored. (Of course, we then got President Trump and NAFTA became USMCA, and boards with photos, strings, and pins became the mainstream media.)  

In terms of monetary policy, after ‘doing an Ueda’ (i.e., Googling someone markets are supposed to pretend we know everything about), Goolsbee has in the past mentioned the need for a Fed “séance to the ghost of Volcker” if excess inflation and demand result in higher inflation expectations, which would require “the Fed Funds rate going to 20%”(!), but only to then dismiss that approach as a “devil” that only results in stagflation. Indeed, at the end of October last year, when still Professor of Economics at the Chicago Booth School, he spoke to Bloomberg and noted: “The Fed can raise interest rates, the Fed can raise unemployment, but higher unemployment is not going to bring down prices if a large component of that inflation is coming from [supply].”

In other words --surprise!-- Goolsbee’s a dove perhaps heading for the Fed Vice-Chair. And Brainard is better placed to push for a digital dollar --if not MMT-- from the NEC than she is from the Fed. Oops! I’m back at the board again! The White House will be talking about aliens next…

So, where does this leave Fed Chair Powell? Feeling out of the loop? Or might he be even more determined to get things done while he still can? The risks may be of the latter, especially with the retail and housing numbers, on top of payrolls and initial claims. Or the recent pick up in Bitcoin. Oh no! I’m back pointing at photos, string, and pins, aren’t I?

As was mentioned to me yesterday, the next FOMC dot plot will be pivotal because the Fed knows the market is looking at it carefully and is expecting it to act hawkishly; and the market knows the Fed knows it knows that. Hence, if the Fed doesn’t shift its dot plot higher as well as hiking then the market, which only just shifted its rate expectations up towards the bottom end of the last dot plot, will almost certainly react by shifting them back down again, easing financial conditions. As a result, as was reiterated yesterday, the risk is of an argument that was also seen as a board with photos, string, and pins meme last year – even higher for even longer.

Meanwhile, perhaps as a precursor for the Fed(?), Aussie labor data were weaker than expected. Part-time jobs rose 31.8K, but full-time were -43.3K, and the unemployment rate rose from 3.5% to 3.7% alongside a tick lower in the participation rate to 66.5%. On one hand, this makes it easier for the RBA to hold off on rate hikes. (More so as CBA household spending slumped 6.9% m-o-m in January, and February inflation expectations dipped from 5.6% to 5.1%.) However, given inflation is still too high, and that an RBA pivot would see housing, employment, and --inflation-- pick up again, and that the Fed is doing more, not less, and China doing less, not more, pressuring, AUD, the RBA can’t sit relax. It can only sweat profusely.

Finally, journalist Seymour Hersh is in the German press making the bold, evidence-free claim that “The President of the United States would rather see Germany freeze than [see] Germany possibly stop supporting Ukraine.” Perhaps - but sometimes stringers just have pins. Indeed, see this rebuttal in Tablet, which notes Hersh’s loose relationship with the truth, and underlines the people who think Biden can’t remember his own name or stand up for the US are saying he was also capable of cold, calculating, Machiavellian action. I also repeat that it doesn’t matter who blew up NordStream in terms of how markets should react – but they haven’t done so. No matter how clear the photos are, how thick the string is, and how deeply the pins are inserted, nothing seems to penetrate.