Too much Fed news

Another month, another front-page appearance by the Federal Reserve. Make that “appearances.”

First came the Justice Department subpoena served to Chair Jerome Powell; his extraordinary video retort followed; Fed Governor Lisa Cook’s Supreme Court hearing begins with Powell in attendance; then the policy-setting meeting; and, on the last business day of January, the White House’s nomination of Kevin Warsh as chair. Busy, indeed.

Kevin Warsh has the pedigree for the position. The biggest hurdle to his confirmation and then success as chair will be to convincingly show he won’t be unduly influenced by the Trump administration or other politicians. While he is unlikely to be as patient as Chair Powell from the standpoint of continuing the rate-cutting cycle, we think his previous time at the Fed might lend him to push back against excessive political pressure. The Senate is likely to confirm him, though potentially not until the subpoena is dropped — negotiating tool number one.

Speaking of that. Powell’s video indicated he finally was pushed to his limit. He tried brushing off the criticism, met President Trump in the headquarters’ construction zone (the premise of the subpoena), and welcomed the White House’s Stephen Miran to the Board of Governors. He also did not strongly condemn the mortgage fraud charges the administration levied against Governor Lisa Cook. This is not to say he lacked a backbone, but that he took a standoffish approach to reinforce the central bank’s independence. 

Now the gloves are off. He attended Cook’s Supreme Court appearance, calling it “perhaps the most important legal case in the Fed’s 113-year history” in the press conference following the January Federal Open Market Committee (FOMC). And the Justice Dept. action might also lead him to stay on the board after his term as chair ends in May. The latter is speculation, though the smoke from that potential fire is billowing.

The Fed still runs monetary policy, right?

You would be justified in wondering, but the January meeting was simply not eventful enough to push the other stories aside. The FOMC kept the fed funds target range at 3.50-3.75% and the statement essentially the same. The most salient change was the removal of the clause in the December statement that “downside risks to employment rose in recent months.” Combined with other alterations and Powell’s remarks, the gist is that policymakers are less concerned about a weakening labor market, so the mandate scale is now balanced between that and inflation. The New York Fed will continue to purchase $40 billion of Treasury bills per month to ease overnight funding operations.

Also relatively notable was the rotation of Fed regional bank presidents, that barely shifted the FOMC dove/hawk composition. It doesn’t alter our view that the next ease will be in June at the earliest. Somewhat surprisingly, the front end of the US Treasury yield curve was unchanged throughout January.

That’s fine with us

The curve’s positive slope allows industry money managers to buy securities with longer maturities and potentially higher yields than those likely after a rate cut. And a terminal fed funds rate anywhere above 3% makes the case for liquidity products strong.

Lastly, President Trump’s announcement directing Freddie Mac and Fannie Mae to buy $200 billion additional mortgage-backed securities (MBS) doesn't impact the front end directly, but could lead to more front end issuance. The supply from these Government Sponsored Entities (GSEs) would be welcome, as the dominant issuer in the front end is the Federal Home Loan Bank System.