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Roberto Perli Profile picture
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25 Aug, 8 tweets, 4 min read
Short thread on the consequences of picking the next #Fed chair, inspired by this good piece by @chrisjcondon, @StevenTDennis, and @SalehaMohsin.

I agree with the main take, including that Powell "rebuilt bipartisan respect for the Fed." 1/8

bloomberg.com/news/articles/…
If you look at betting markets, Powell has very high odds of getting renominated. I think 84% is grossly exaggerated because I suspect Sen. Warren et al won't give up easily. But I give him the edge at this point, maybe 60-40. 2/8
.@SecYellen open support a few days ago helps but probably won't seal the deal. Politics still matters, and after all Powell is a Republican nominated by Trump who is perceived by some to be too easy on banks. 3/8

reuters.com/business/yelle…
But replacing Powell b/c he is a Rep. would be the same as replacing Yellen b/c she was a Dem. It would be an attempt at politicizing the Fed, would reflect poorly on the Admin, and would throw sand in the transmission gears of monetary policy. 4/8
marketplace.org/2017/11/02/tru…
IOW, it would adversely affect the ability of the FOMC to carry out the jobs-friendly policies Powell started.

It's a *fantasy* that anyone can steer the FOMC in the direction they want. It takes internal credibility and political backing. Powell has them, others don't. 5/8
It's true that maybe in 3 years monetary policy will be in the same place under Powell or under a substitute. But the transition would be tricky, volatile, and disruptive. And it would put the Admin at a disadvantage in the midterms and the 2024 election. Why take the risk? 6/8
If the concern is bank regulation, that's what easily and *more effectively* solved by nominating someone appropriate as vice chair for supervision: That's where regulatory policy originates, not with the chair. 7/8
In short, replacing Powell would be a *blunder* (chess fans can relate, I'm sure). I don't think the Admin has self-harming tendencies. Powell should be renominated. 8/8

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More from @R_Perli

Roberto Perli Profile picture
21 Aug
Brief thread on the Fed's attitude towards inflation.

The July minutes reiterated that the general FOMC view is that currently elevated inflation is likely transitory. No complaints from me here—I agree, and the data (for now, at least) support it. 1/X
However, "most" FOMC participants also believe that substantial further progress has been made towards the inflation goal.

I struggle with this. If higher inflation is transitory, then the progress made so far will be ephemeral and eventually prove to be no progress at all. 2/X
The market appears to be struggling with this as well. In fact, the market is now expecting a lower terminal Fed funds rate (well below the FOMC's median long-run dot of 2.5%) and more rate hikes in the near term. I.e., the market lost faith in the new FAIT framework. 3/X
Read 5 tweets
Roberto Perli Profile picture
11 Aug
Brief thread on real yields.

One of the questions I am asked often is what these very low real TIPS yields mean. Many tend to take them as signs of bad news for US growth. But is that read accurate? 1/4
The problem is that there are other things that "contaminate" TIPS yields and that muddle the waters. Specifically, these things are risk premiums and liquidity premiums.

We can always express TIPS yields as follows (estimates from DKW). 2/4
Liquidity premiums, in particular, are estimated to be very low (close to record lows, in fact); they appear to have been the main drivers of TIPS yields in this Covid era. Coincidence of not, the last time they were so low was at the tail end of QE3. 3/4
Read 4 tweets
Roberto Perli Profile picture
20 Jul
Short thread.

The Treasury mkt continues to gyrate. It's interesting how momentous the June FOMC meeting was for the mkt. Since then:

1. The expected trajectory for the FFR rotated (higher rates in years 1-3, a lot lower after (i.e. the mkt doesn't believe in FAIT at all).
2. The market's estimate of the neutral rate (the expected FFR 7-10 years ahead) collapsed and continues to move down (left). Most of it is lower inflation expectations not lower expected real rates (right).
3. The drop in the market's view of neutral was within the bottom 5% of all one-month moves since 2007 (when our data begin). Only during the GFC, the European debt crisis, and the onset of Covid (March 2020) have we seen larger drops. It was that big.
Read 4 tweets
Roberto Perli Profile picture
21 Jun
Brief thread to look at the damage that the FOMC meeting did to market expectations and the market outlook for the US economy.

Most people point to the sharp decline in 5Y fwd breakevens, which were approaching better levels and now are sinking. Yes, but there is more. 1/6
The market is 100% buying that the Fed will raise rates sooner and faster than previously thought (it always did, and even more so after the FOMC). Look at the higher expected trajectory for the FFR for the first four years. 2/6
But, looking again at the chart in the previous tweet, expectations five yrs ahead and beyond have moved *down*. The market thinks that, by being preemptive, the Fed won’t need to hike as much later. Basically, the market thinks the Fed has already abandoned FAIT. 3/6
Read 6 tweets
Roberto Perli Profile picture
13 Apr
Thread: Interesting results from the NY Fed’s March surveys. Bottom line, the surveys confirm that the #Fed is getting only half of its message across to investors.

First, both primary dealers and market participants see high odds of early and fast liftoff. 1/6
Second, the odds of 2022 liftoff are about flat since December, but the odds of 2023 liftoff have increased to about 70%, according to primary dealers. A bit less according to broader market participants. 2/6
What is perplexing is that investors believe in early/fast liftoff despite seeing PCE inflation not even at target as a base case for the next 5 years or the subsequent 5 years.

Table shows PCE inflation translated from original CPI inflation in the surveys. 3/6
Read 6 tweets
Roberto Perli Profile picture
19 Mar
1/8 This is a thread about whether Fed policy is really as easy and dovish as it seems and as the Fed intends it to be.

I would argue it is not, and not because the Fed doesn't want it to be, but because markets are skeptical of the new Fed's framework, as the chart shows.
2/8 Monetary policy works via financial markets, and financial markets price interest rates in part based on expectations of what the Fed will do in the future.

This year, markets have pushed up the expected path for the fed funds rate a lot, despite the Fed's reassurances.
3/8 That investors are not in sync with the Fed is also evident from surveys — see this thread for our @csmresearch recent survey of investors expectations and for how it is not consistent with the Fed’s intentions.
Read 8 tweets

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