Culture at the Federal Reserve

Every single person on #FinTwit needs to listen to this conversation between @DiMartinoBooth and @TFL1728 to learn what the Fed is doing and why. We’re going higher for longer, your offshore dollars be damned. https://t.co/4i7aHTZoRd

— 🦚Phil (#PowellisMyPal) Gibson🍊 (@MrPseu) February 14, 2023

Things may have changed culturally in the FED under Powell's leadership who is private [sector] Equity guy as opposed to the academics of Bernanke [and Greenspan] and Yellin who are clearly not cut from the same cloth as Jay Powell.  

So, if i had to venture from what I've heard, the culture hasn't changed as much as the leadership has.  There's a high probability that the staff at the Federal Reserve board and throughout the system throughout the 12 districts that they were responsible in large part for pressing with this transitory narrative that inflation was going to be transitory in nature.  They weren't focused on the fact that the transmission mechanism of monetary policy had changed: instead of using the banking system as a conduit to make loans to assess credit worthiness, the FED just monetized money that was then directly deposited into the checking accounts of American consumers.  It obviously sparked inflation that was not transitory in nature, if you're measuring transitory in a matter of months.  And yet the staff failed to see because academics have issues with vision.  I think the staff had failed to Envision that changing the transition mechanism was critical.  It was a critical change element that they didn't incorporate into their models.  They insisted that inflation was going to be transitory that ended up leaving a lot of egg on Chairman Powell's face that he took the guidance of his staff.  I think a lot of the shift and the tone in his mannerisms that have followed reflect a man looking outside of the organization, right now, for direction, for monitoring, and intelligence.  As well as . . . he's not going to alienate the entire staff, but there was also a massive power struggle that took place that shouldn't have.  I put that on the Biden Administration.  I would have put that on any administration whether it was Democrat or Republican, any administration that dragged its feet as long as it did.  You're going to end up creating a crisis of confidence and a leadership vacuum at the head of the most important Central Bank in the world.  And that is indeed what took place when the Biden Administration was pitting Lael Brainard against Jay Powell for a very long time.  So it's not really an office that you leave vacant technically for months and months on end. "Please leave a message for the checker . . . ," that's not how it works.  And yet that is exactly what happened.  I think we need to look at a chastened Jay Powell and a man who is wearing more of his lawyer hat from his past life now, and trying to get in all sorts of viewpoints not just from, what I call in my book, Fed Up, GroupStink and being surrounded by people who all think the same way.

Well, that's the interesting part.  I attribute a lot of what the Biden Administration does to malice as opposed to anything else. Interesting now that Lael Brainard is thinking about leaving the Fed to go to the Treasury.  The structure of the Fed has the chairman of the New York Fed, in this case, John Williams, supposedly the Vice Chair, but after the meeting between Biden, Powell, and Brainard, where Biden said I'll nominate Jay Powell, the deal was that Brainard was supposed to become Vice Chair.  Did that ever happen? 

There are two vice chairs.  Actually, there are more than two, but there are two vice chairs that are considered to be power seats.  There's this triumvirate at the top of the Fed so that by law the president of the Fed has a permanent vote, as opposed to Chicago and Cleveland--they vote every other year, and that's just a reflection of what the U.S. economy was in 1913 that Cleveland and Chicago, after New York, were ascribed to be the most powerful regional economies in the country. Of course, that's no longer the case today.  And then the other 9 district presidents rotated every 3rd year to vote on the FOMC, and that's really . . . we don't sit around today in 2023 versus 2022, and say "Oh, did you see what Jim Bullard said?" because Bullard voted in 2022; he's not voting in 2023.  So he ran to say what he wants but he doesn't have a vote.  It makes a huge difference.  John Williams, again, he's the Vice Chair of the Federal Open Market Committee.  If Jay Powell gets run over by a train, he runs the Federal Open Market Committee that decides interest rate policy.  The Federal Reserve Board has its own meetings that do not necessarily entail the entire FOMC.  They make decisions based on other things that do not involve the District Banks.  Lael Brainard is Vice Chair of the Federal Reserve Board.  So if Jay Powell gets run over by a train, she runs Federal Board meetings.  The three of these individuals collectively are considered to be the main power structure within the Fed.  What's curious since you raised John Williams' name is he was kind of Yellen's protégé.  So it's been quite fascinating seeing Williams state very loyal to Powell in deference to his own typically dovish leanings.  So this is a very politicized Fed when you see allegiances betray philosophies, and that's what we're seeing with John Williams.  He's typically dovish.  He has held the hawkish line for Powell and that would be against Brainard, by the way. 

And Yellen . . . at the Treasury.