To pivot, or not to pivot? That is the question Fed Chairman Powell will have pondered over the weekend while tending chicken breasts, franks and burgers spaced meticulously on the grating of a 148,000 BTU grill. If conscience doth indeed make cowards of us all, we might expect him to act boldly. But how? Does he risk gutting the American Dream for a generation or longer by staying the course? Recall that his last utterance, on March 7, implied not merely that credit tightening would continue, but that it would accelerate. The stock market reacted like a concertgoer sitting in the middle of a row who has just felt the first gurgle of food poisoning in his bowels. Sellers panicked with spasms that quickened as the week wore on, and it was fully five days before fears appeared to recede. Investors opened their air locks last Monday and cautiously drew a lungful of what they hoped would be oxygen. It was, with just enough helium to make the broad averages frolicsome at times, if not quite giddy.
One could almost forget that the U.S. economy is in shambles as some of the biggest multinational companies continue to scale back growth and axe workers by the tens of thousands. Biden’s tax proposal threatened to beggar what remains of America’s middle class; the nation’s military preparedness was being exported to Ukraine; and our three worst enemies — China, Russia and Iran — were making nice to each other. Although GDP growth was officially reported most recently at around 3%, pundits were unofficially speaking of recession as though it were an entrenched reality, not merely a threat.
If the picture were not already grim enough, the haymaker came last weekend with the failure of two large banks that cater to tech companies, Silicon Valley Bank and Signature Bank. The Fed did what it had to do to calm the herd, lifting the $250,000 cap on insured deposits to…whatever. Backing from the U.S. Treasury and the FDIC supposedly put taxpayers on the hook for as much as $9 trillion, but when the numbers get that large, who’s counting any longer?
Powell has been almost Volcker-like in stomping his foot on the brake and keeping it there. He faces a tough choice, though, since even a pause rather than a pivot would act like methamphetamine on Wall Street’s tiny, fevered brain. My guess is that he will pause anyway, but with a profuse warning that the hiatus will not last. This cautionary note is unlikely to restrain the stock market, especially since everyone will recognize it as a bluff. Indeed, however much Powell & Co. may want to keep on tightening, they will not be able to do so when the so-far trickle of deposits leaking out of regional banks and into the digital vaults of the Big Four turns into a flood. We’ve all wondered for a decade what form the inevitable black swan might take, but this scenario seems plausible enough to be taken seriously.[For an explanation of why the Masters of the Universe and their Guvmint lackies could not impose a digital money system on America in a crisis, click here for my recent interview with Howe Street‘s Jim Goddard. I also explain why bitcoin is worth perhaps $3-$4 rather than $27,000 (let alone $70,000).]