Regime Change at the FOMC

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No, not that regime change. Swapping out Kevin Walsh for Jerome Powell will not matter much — to either inflation narrowly or the economy more broadly. This is because the dominant theme in government...

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The entire post-financial crisis era  was driven by monetary policy. The era during and after the pandemic was characterized primarily by fiscal policy.This is why the Fed was unable to get inflation up to 2% in the 2010s; it’s also why the Fed has had such difficulty getting inflation down to 2% in the 2020s.What made the GFC unique was the over-reliance on monetary policy. Following the credit-driven collapse of the financial crisis, the biggest risk to the economy was DE-Flation, that gravitational pull toward zero. Between ZIRP  and $3.6 trillion in quantitative easing ,1 Disinflation was the driver. PCE stayed under 2%, as soft job creation and wage gains kept consumer spending modest and inflatio","collect":0,"end_time":0,"defaultTopTitle":"ritholtz.com","property":[],"viewcount":null,"language":"en","relate_stocks":{"EDV":"美国延期国债ETF-Vanguard","TMF":"3倍做多20年期以上国债ETF-Direxion","TIP":"通胀债券指数ETF-iShares Barclays","SKRE":"TUTTLE CAPITAL DAILY 2X INVERSE REGIONAL BANKS ETF","AGG":"债券指数ETF-iShares Barclays综合国债","TBT":"债券20+美国债指数ETF-ProShares两倍做空","BOXX":"ALPHA ARCHITECT 1-3 MONTH BOX ETF","XLF":"金融ETF","VFH":"Vanguard Financials ETF","BIL":"债券指数ETF-SPDR Barclays美国1-3月国债","TLTW":"iShares 20+ Year Treasury Bond Buywrite Strategy ETF","HYG":"债券指数ETF-iShares iBoxx高收益公司债","UBT":"债券20+美国债-ProShares两倍做多","SCHO":"嘉信短期美国国债ETF","JPST":"JPMorgan Ultra-Short Income ETF","MUB":"美国市政债ETF-iShares","IEI":"iShares Barclays 3-7 Year Trea","LQD":"债券指数ETF-iShares iBoxx投资级公司债","USHY":"iShares Broad USD High Yield Corporate Bond ETF","BOND":"Pimco Total Return ETF","VCSH":"美国短期公司债-Vanguard","MINT":"PIMCO Enhanced Short Maturity Exchange-Traded Fund","VGSH":"美国短期国债ETF-Vanguard","GOVT":"iShares安硕核心美国国债ETF","TLH":"iShares安硕10-20年国债ETF","ZROZ":"PIMCO 25+ Year Zero Coupon U.S","VCIT":"美国中期公司债-Vanguard","TYO":"3倍做空7-10年期国债ETF-Direxion","TLT":"20+年以上美国国债ETF-iShares","UDN":"做空美元指数-PowerShares","VGIT":"中期国债ETF-Vanguard","NGHT":"Nicholas Bitcoin and Treasuries AfterDark ETF","TBIL":"US Treasury 3 Month Bill ETF","SHV":"美国短期国债ETF-iShares","UUP":"美元ETF-PowerShares DB","GOLY":"Strategy Shares Gold Enhanced Yield ETF","KBE":"银行指数ETF-SPDR KBW","FOMC":"FOMO CORP.","GBIL":"Goldman Sachs Access Treasury 0-1 Year ETF","BSV":"短期国债指数ETF-Vanguard","BND":"债券指数ETF-Vanguard美国","PBDC":"Putnam Bdc Income ETF","SHY":"债券指数ETF-iShares Barclays 1-3年国债","VGLT":"美国长期国债ETF-Vanguard","KRE":"区域银行指数ETF-SPDR KBW","FAZ":"三倍做空金融ETF-Direxion"},"translate_title":"FOMC的政权更迭","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"EDV":0.65,"UDN":0.65,"USHY":0.65,"FOMC":1.5,"LQD":0.65,"MUB":0.65,"VCIT":0.65,"BND":0.65,"TYO":0.65,"VGIT":0.65,"SHV":0.65,"TLT":0.6,"UBmain":0.6,"UUP":0.65,"MINT":0.65,"VGSH":0.65,"TBT":0.65,"VFH":0.6,"AGG":0.65,"TMF":0.65,"PBDC":0.65,"BIL":0.65,"FAZ":0.65,"ZFmain":0.6,"HYG":0.65,"SKRE":0.65,"JPST":0.65,"ZROZ":0.65,"UBT":0.65,"GBIL":0.65,"BOND":0.65,"GOVT":0.65,"TLH":0.65,"GOLY":0.65,"TNmain":0.6,"SCHO":0.65,"BOXX":0.65,"KRE":0.6,"XLF":0.6,"ZTmain":0.6,"NGHT":0.65,"IEI":0.65,"SHY":0.65,"TLTW":0.65,"TIP":0.65,"VGLT":0.65,"KBE":0.65,"BSV":0.65,"TBIL":0.65,"VCSH":0.65},"content_text":"No, not that regime change.\nSwapping out Kevin Walsh for Jerome Powell will not matter much — to either inflation narrowly or the economy more broadly.\nThis is because the dominant theme in government policies – the one driving the overall economy – is less susceptible to FOMC action in this regime than in the last. The entire post-financial crisis era (aka the 2010s) was driven by monetary policy. The era during and after the pandemic was characterized primarily by fiscal policy.\nThis is why the Fed was unable to get inflation up to 2% in the 2010s; it’s also why the Fed has had such difficulty getting inflation down to 2% in the 2020s.\nWhat made the GFC unique was the over-reliance on monetary policy. Following the credit-driven collapse of the financial crisis, the biggest risk to the economy was DE-Flation, that gravitational pull toward zero. Between ZIRP (2008 to 2015) and $3.6 trillion in quantitative easing (QE),1 Disinflation was the driver. PCE stayed under 2%, as soft job creation and wage gains kept consumer spending modest and inflation expectations anchored.\nCongress abandoned its usual playbook and let the FOMC do all the heavy lifting. The post-GFC era was notable for a lack of fiscal stimulus – along with (not coincidentally) weak job and wage numbers.\nQE and ZIRP primarily benefited capital, not labor; stock and bond holders did well; real estate owners saw a recovery, followed by price gains. Creditworthy individuals and healthy companies each refinanced their outstanding debt at low cost.\nCredit was cheap, and Capital was practically free. \nThat changed during the pandemic era and beyond (2020–Present) as the opposite regime took hold. As Jerome Powell put it last August at Jackson Hole, “As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant.”\nThe foolish GFC fiscal austerity – including sequester and debt ceiling fights – was replaced with the largest peacetime fiscal expansion in U.S. history. This, combined with Powell’s “intentional overshoot,” helped to drive inflation up to 9%. Congress failed to engage on the fiscal side following the GFC; they wildly overcompensated for this error during the pandemic).2\nThe chart above is from Deutsche Bank’s Jim Reid – he points out that  the change from lower inflation was inevitable:\n“Whilst many thought we were in a permanent period of lower inflation, the post-pandemic era has shattered many of those assumptions. We had already passed peak globalisation and the point of most supportive demographics by the mid to late 2010s, foreshadowing future inflationary pressures. But then the record peacetime stimulus of the Covid period, combined with significant supply chain disruptions, accelerated this trend. Then a war-related energy spike in 2022 further cemented inflation, and in 2026 we’re faced with another energy shock from the Iran conflict.”\nForget Warsh for Powell; swapping Fiscal for Monetary policy is the regime change that matters.\nPreviously:\n2% Inflation Target is Silly (July 26, 2023)\nThe Fed is Finished* * (…Raising Rates) (November 1, 2023)\nInflation Comes Down Despite the Fed (January 12, 2023)\nWhy Is the Fed Always Late to the Party? (October 7, 2022)\nFive Ways the Fed’s Deflation Playbook Could Be Improved (Businessweek, August 18, 2023)\nWho Is to Blame for Inflation, 1-15 (June 28, 2022)\n\n__________\n1. To say nothing of Operation Twist, and the use of forward guidance as a policy tool…\n2. Raise your hand if you think you know why!\n__________\n1. To say nothing of Operation Twist, and the use of forward guidance as a policy tool…\n2. 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