DSTs and Talking Down Rates

It really helps to have friends who are smarter than you.  In this case, I am talking about my great investment banker friend, Steve Mark.

Hey, he’s gotta be smart, he’s an investment banker.  Last time I checked they all go to expensive private schools, then get funneled into law school or grad business school and end up on Wall Street.  That’s a hell of a lot more than this schlep distance runner from the U of O ever did.

Listening to Chairman Powell the other day regarding interest rate cuts, I had to scratch my head.  How can he continue to insist on multiple rate cuts later this year in the face of rising inflation?  Mind you he referred to this as “just bumps in the road.”

Please remember this is the same guy who was adamant that inflation was “transitory.”  We think allowing inflation to fester and then explode in this manner is the worst mistake the Fed has made in the last 40 years.

But I digress. Leveraging up on Steve’s smarts, I decided to give him a call.  “Help me out buddy.  I’m not connecting the dots here.”

Fortunately, Steve was in a beneficent mood that morning and shared he had been pondering this as well.  I would like to say great minds think alike but…

His conclusion is that Fed Chairman Jerome Powell is doing his best to ‘talk’ rates down without actually cutting them.   Like placing oil on troubled waters, this is intended to have a calming effect on capital markets.

In so doing, it is hoped lending will begin to normalize, deal volume will improve, and an economic hard landing can be avoided.

At its best, this is a Faustian bargain.  In an election year lawmakers want a quick return to easy money.  By accommodating these desires, the Fed is gambling that higher inflation now is better politically than the risk of a recession.

But here’s the real trick:  by talking about it while delaying actually doing anything, Powell may again escape responsibility for his actions if inflation takes off.  He can keep investors and politicos happy with the current melt-up in asset prices, while covering his own ass if things don’t go according to plan.  Pretty neat, huh?

One difference between government and business is that there are consequences for failure in business.  Just ask the C-Suite guys at Boeing.  In government, not so much. A good gift of gab, friendly media and some slight of hand goes a long way.

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