The Long and Winding Road

The Beatles 20th (and last) #1 hit, and maybe even the band’s final recording, is the melancholy of “The Long and Winding Road.” It was completed in 1969, and it still causes young and old to sing along.

Similar is the sing-along of Wall Street’s constant focus and infatuation with Jay Powell and the Federal Reserve. Jerome (Jay) Powell has been the Chair of the Fed since February 2018 and has been in Washington since the first George H.W. Bush administration, with a corporate hiatus with Carlyle Group (partner, of course) from 1997 until 2005. He follows in the footsteps of Paul Volker (larger than life), Alan Greenspan (briefcase indicator), Ben Bernanke (self-appointed savior), and Janet Yellen (I have nothing), and continues to fool us into believing that the Fed has everything under control (transitorily of course).

Here we go again this week on “Fed Watch”. Tune into any of your favorite financial entertainment channels, and you can almost hear them singing along……

The long and winding road
That leads to your door
Will never disappear
I've seen that road before
It always leads me here
Lead me to your door

Paul Volker served as the Fed Chair from 1979 until 1987 and has long been given credit for breaking the back of inflation by raising short-term interest rates to over 20% (not a typo). It worked, as inflation peaked at nearly 15% in March 1980, and fell below 3% by 1983. Alan Greenspan followed Mr. Volker, and the love affair for the Fed was on. The “Greenspan put” was on from 1987 until he left in 2006. But then came the “Great Financial Crisis”…..

The wild and windy night
That the rain washed away
Has left a pool of tears
Crying for the day
Why leave me standing here?
Let me know the way

You kinda felt bad for the new guy, Ben Bernanke, at least until he told Congress in March 2007 that subprime was contained. And then he claimed that he saved us from another great depression. He was probably right, up until QE1, then QE2, and then leaving rates at zero until mid-2013, then Operation Twist, then QE3, then QE3 expansion. The economy can’t be trusted; it really needs the Fed – you see? Was the shine coming off, and were we ready to put the Fed in its proper perspective? Not a chance.  

Many times I've been alone
And many times I've cried
Anyway, you'll never know
The many ways I've tried

And still they lead me back
To the long winding road
You left me standing here
A long, long time ago
Don't leave me waiting here
Lead me to your door 

So, Janet Yellen becomes the new Chair of the Fed in January 2014. She raised the short-term interest rates to 1.5%, argued with Congress a lot (not her fault), insisted on the change from Chairman to Chair, persisted that there was not an “everything bubble” in July 2014, and then was not renominated by President Trump in 2016. Which leads us to the current Chair, Jay Powell….

But still they lead me back
To the long winding road
You left me standing here
A long, long time ago
Don't keep me waiting here
Lead me to your door

Yeah, yeah, yeah, yeah

So yeah, Jay Powell is the consensus builder and problem solver. He gets along with everyone (except Trump), argues for the dual mandate of stable prices and full employment. Then COVID hits, and the playbook gets dusted off, rates go back to zero, stimulus piles in, inflation heats up, only to claim that this inflation is “transitory”. But no, stubborn indeed is this inflation, and interest rates have now been raised 10 times. This is, as the Fed has argued, to tame inflation (the old Volker playbook).

So the long and winding road of the fed will continue, we will not question their collective wisdom, and our infatuation grows and grows. What then for markets? It is likely to move in very long cycles. The bond market moved in one direction from 1982 until 2020. We will likely see “higher for longer” as opposed to “lower for longer” as many hoped for. So buckle up, because the air is about to get pretty unstable.

It reminds me of another Beatles classic – “Help!”

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