Is Fed Chairman Powell The Real Election Winner?

As President Donald Trump continues to insist that he will be the winner of the election after all the legitimate votes are counted and the illegitimate ones thrown out, at least one publication has declared a different winner. Not Joe Biden, but Federal Reserve chairman Jerome Powell.

The Wall Street periodical Barron’s argued Powell has become a more important figure for markets than whoever occupies the White House. 

Even as the presidential election outcome has been beset by uncertainty all week, Wall Street didn’t panic.  Quite the opposite.  Stocks surged on expectations for divided government and gridlock – and four more years of Fed stimulus.

The more divided and dysfunctional Washington is, the more power that accrues to the central bank. If Congress, the Senate, and the President can’t come to terms on another fiscal stimulus package, then the burden will fall squarely on the shoulders of the Fed to ramp up new monetary stimulus schemes.

Since the coronavirus pandemic hit, Fed officials have pumped trillions of dollars into financial markets and provided lending backstops for corporations. Fed Chairman Jerome Powell is now also being urged to create a financing vehicle for state and local governments.

Meanwhile, Powell announced yesterday that he would keep the Fed funds rates unchanged near zero and continue to pursue accommodative monetary policy until inflation picks up more strongly.

Jerome Powell: Our ability to achieve maximum employment in the years ahead, depends importantly, on having longer term inflation expectations well anchored at 2%. As we said in September, and again today with inflation running persistently below 2%, we will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer term inflation expectations remain well anchored at 2%. We expect to maintain an accommodative stance of monetary policy until these employment and inflation outcomes are achieved.

Powell’s 2% inflation target, which has now become an “above-2% inflation for some time” target, has no proven connection to full employment or real economic growth.  There’s no proof that hiring or productivity are somehow maximized when the currency depreciates at an average rate of 2% or 3% instead of 1% or 0%.  And let’s not forget that the U.S. government-reported inflation rate is lower than the actual inflation rate, so consumer price inflation is well above 2% already.

The Fed is fixated on raising inflation as a tool to help large debtors including the U.S. government manage their debt loads. Inflation serves as a backdoor bailout for borrowers by steadily reducing the real value of what they have to pay in interest and principal.

No conceivable election outcome was going to result in the government spending less money or paying down debt. 

The path of least resistance for politicians of both parties is to keep kicking the can down the road and putting off difficult decisions when it comes to fiscal responsibility. There’s no real incentive for members of Congress to do otherwise when they can simply offload all their excesses to the central bank’s balance sheet. 

The post-election reality of more Fed accommodation to come helped drive the U.S. dollar index lower and precious metals markets sharply higher on Thursday. Gold closed at its best level in 7 weeks, suggesting technical momentum building for a larger rally.

Looking ahead to next week, we will see if the ongoing election fallout has any further impact on markets.

President Donald Trump has given no indication that he will concede defeat even if media outlets officially declare Joe Biden the winner. It’s worth keeping in mind that news desks can declare whatever they want, but they don’t get to determine how the process will play out with ballot counting and possible legal challenges.

Fox News and other news outlets are under fire for prematurely calling Arizona for Joe Biden. It stubbornly refused to retract its call even after the Trump campaign offered a plausible path to victory there.  That made for some awkward moments during programs hosted by pro-Trump commentators.

Not only did other networks agree that Arizona was still up for grabs, but so did political prediction markets. Bettors who put their money on the line still gave Trump a 30% chance of ultimately winning the Grand Canyon state as of Thursday night.

Political odds swung wildly from Biden to Trump on election night, then back to Biden the following day. Prediction markets don’t always get it right, but they do reflect new information as it becomes available.

By contrast, news desks with teams of number crunchers who cling dogmatically to a particular model can end up making a monumental error. At this point, Fox News and some other outlets are trying to impose an alternate reality where Biden has a 100% chance of winning a state that markets say is nowhere near that certain. 

Even if Biden ends up winning it, the fact that Arizona is still competitive at this time means that anyone who previously declared it decided was wrong.

Honest journalists and smart investors listen to market signals and make adjustments when their models or their strategies fail.  Central bankers who try to fix interest rates and inflation rates at levels they deem optimal risk making catastrophic mistakes because they don’t see all the signals a free market in money and interest rates would be sending.

Of course, one very powerful signal that the Fed is creating too much inflation is when precious metals markets make big gains.

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