Did Powell know the wild nonfarm number ahead of the release?

Outlook: The institutional factor in FX, in most cases the central bank, is front and center today. The key question for Fed chief Powell went unanswered yesterday–did Powell know the wild nonfarm number ahead of the release and if he had known it, would it have changed the Fed’s decision two days earlier?

Powell dodged the question, which we see as a mistake. Technically, nobody, not even the Fed, can see the BLS number ahead of the release. Powell could have buttressed the BLS reputation by affirming he didn’t have the information ahead of everyone else. But it’s dangerous to assume he did have the number and went with 25 bp anyway in order to be consistent with the many hints it would be 25 bp. If the Fed had done 50 bp last week, everyone would be asking what did Powell know that the rest of us did not. In other words, if he had the information, he couldn’t act on it and risk outing the BLS.

And still, if he didn’t have the information, what are the Fed economists failing to do that the BLS data guys are doing? The Fed publishes jargon-riddled and math-laden essays that only one in a million can actually understand. Data collection is not their job, apparently. The regional Feds do publish readable essays for the public, like the Cleveland Fed’s inflation varieties and the NY Fed’s “underlying inflation” (UIG) stories. These are somewhat more useful but pointedly decline to draw conclusions.

About that underlying inflation gauge from the NY Fed, fashioning itself the “Liberty Street Fed” (an effort to compete with London’s “Lombard Street,” maybe)–the core of the latest story is shown in the chart. 

The point of this chart and many others is that a “true” measure of inflation is far lower than the reported headline CPI. You can also multiple the monthlies and get far smaller inflation rates than the headline, but that’s just silly. The point none of these measures can address is that the Fed fears that devil, Lag. And lag can deliver a resurgence in inflation after a seemingly satisfying drop. Mr. Powell is clearly expecting inflation to remain troublesome and surge again after the lag arising from the wild jump in payrolls.

In addition, another form of resurgence can arise from things like the price of oil, which just jumped over $2 in one day on the earthquake news, the US withdrawing from the reserve, and other matters. We have been lucky on the inflation front in having relatively cheap oil, some of which can be attributed to a warm winter. If the summer is extra hot or the next winter extra cold, that inflation advantage goes away. Fed critics are too short-term. We imagine Mr. Powell has a longer timeframe to consider.

Because of Lag and the non-zero probability of inflation resurgence, we guess the Fed will not be pausing, let alone reversing, this year and maybe not until after mid-year 2024. Note that the presidential election hoo-ha will be in full swing by June 2024 and critics will be coming out of the woodwork to slam the Fed for being political if it pauses or cuts then.

Going to the technicals, the FX charts are hard to read today because the dollar pushback is short-lived, only four days, and not consistent across all currencies. In some, like the euro, it has broken the support line, but not all.

The move can easily be interpreted as just another Tuesday pullback. We see that in the pound, euro, yen and Swissie–the top four. And because it’s not over yet and still has some momentum, that might make the current dollar softness a pullback within a pullback. Longer-term trend followers like us are stuck and two-handed (“on the one hand, buy but on the other hand, sell”). We get plenty of no-win situations but this is one of the doozies.

The wise course of action is to sit it out and chew your fingernails. Alternatively, throw the dice on the counter-trend and take the loss if wrong. Another idea is to hew to the existing trend as depicted in the channel and believe the channel, which means setting guerilla entries ridiculously far away.

Tidbit: Some folks let their preconceptions completely ruin their ability to see straight. As noted above, one economist told Market Watch that Powell “had a chance to signal a shift to a more aggressive posture and he didn’t take it.” Huh? Powell has been relentless in signaling “higher for longer.” What does this critic want that would be “more aggressive”?

Similarly, a usually astute and competent economist writes that “Biden called for more inflation and tax hikes” in the State of the Union speech last night. This is not accurate. To assume that some of the proposals would be inflationary might pass muster, but that’s not the same thing as implying the president actively seeks to get inflation, which no savvy politician would do, and Biden is pretty savvy. As for tax hikes, fairness requires the full statement–yes, tax hikes for billionaires, but no, not tax hikes for everyone. This is something a high majority of the public supports.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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