The Fed talks about not talking about Trump

Unlock the White House Watch newsletter for free

Your guide to what the 2024 US election means for Washington and the world

Good morning. Ride-share company Lyft jumped 22 per cent yesterday and sportswear maker Under Armour was up 27 per cent. The two companies reported good quarters and upgraded forecasts, after years of uninspiring results. Both are second fiddles to larger competitors Uber and Nike, respectively. Is this an underdog market? Should we expect great things from Pepsi next quarter? Email us: robert.armstrong@ft.com and aiden.reiter@ft.com.

The Fed

In central banking, boredom is success. Yesterday’s Federal Reserve policy announcement and press conference were, by this measure, successful. A quarter of a percentage point was snipped off the policy rate. Chair Jay Powell said nothing new about how he and his colleagues see the economy. They still think the following: inflation is falling, the economy is sound, and policy is restrictive. And they are still feeling their way towards a neutral rate, which they will only know when they hit it.

There was no appreciable market reaction. Well done, everyone.

Reporters pressed Powell on what the re-election of Donald Trump, who has made unpleasant noises about the Fed and him in the past, meant for bank policy. Here some non-boring moments managed to slip though. One such moment was the only one-word answer in Powell’s tenure (to the best of Unhedged’s recollection). Would he leave his job before the end of his term, if Trump asked him to? “No.” Next question. Then there was a curt five-worder. Does the president have the ability to fire you or other Fed leaders? “Not permitted under the law.” Noted.

Furthermore, Powell made clear that possible changes in policy under a new Trump administration would not be taken into account by Fed policymakers until those policies were enacted: “We don’t guess, we don’t speculate, and we don’t assume.” (Unhedged’s motto: “We guess, we speculate, we assume.” It takes all kinds.)

A more paranoid interpreter of Fed statements than Unhedged might wonder if this is strictly true.

Powell was asked about the recent rise in long-term interest rates, and whether these higher borrowing costs presented a risk to growth — as he said they did when they were at almost as high a level a year ago, when inflation was still high. The question was clever. The market consensus is the rise in the 10-year Treasury yield is down to “Trumpflation”. The argument is that the next president’s tax, immigration, and tariff policies will increase inflation, and therefore require tighter monetary policy, and increase the deficit, requiring higher compensation to tempt investors to buy the government’s long-term obligations. So the question was about Trump, without mentioning Trump explicitly. Here is part of Powell’s answer:

It’s too early to really say where [long rates] settle . . . I will say, though, that it appears that the moves are not principally about higher inflation expectations. They’re really about a sense of more likelihood of stronger growth, and perhaps less in the way of downside risks. So that’s what they’re about. You know, we do take financial conditions into account. If they’re persistent and if they’re material, then we will certainly take them into account in our policy. But I would say we’re not, we’re not at that state right now.

In one sense, Powell is quite right. The chart below breaks down the increase in 10-year Treasury yields since they bottomed in late September. The larger part of the increase is accounted for by real interest rates, here proxied by yields on inflation protected Treasuries (Tips), in light blue. Almost 40 per cent of the increase is, however, down to higher break-even inflation (the difference between nominal yields and Tips), in dark blue. Higher inflation expectations are an important part of the picture.

Yet, the fact that most of the increase is driven by higher real yields does not imply that it is principally about growth expectations. Higher real yields can reflect growth expectations — which draw money away from safe Treasuries and towards riskier assets. But they can also mean investors are demanding more compensation for higher rate volatility in the future — exactly what investors might do if they thought that the US fiscal situation was becoming more perilous. But talking about the latter possibility would draw Powell into a conversation about responding to things that are (at least in the eyes of the market) very much effects of Trump’s expected policies. And Powell has vowed not to talk about expected policies, let alone act on them. Saying the rate increase is about growth lets him off the hook.

Powell and his team may be decoding the rise in long rates differently than I am, and may have very good reasons to think it is about growth rather than inflation or the fiscal outlook. The point is not to doubt his sincerity, but to highlight what a delicate balance he will have to strike in the months to come, as the shape of Trump’s policies become clearer — or, worse, do not.

One good read

Europe’s indispensable nation is in trouble.