The United States Federal Reserve is not going to tighten. Unless we are in the land of flying elephants and purple bunnies, the reality is the Fed is in a corner and tightening is not going to happen.
In short, the Fed faces a liquidity crisis in the US Dollar. Sure, there is plenty of money in the banking system. In fact, we are at the point there is too much. We also see the wrong make up of Treasury securities, meaning the Fed, since there is no help from Yellen, is going to have to recycling different securities through on a daily basis. This is what the Reverse Repo is about.
Nevertheless, the banks are not lending, hence why they are sitting on so much cash. Without lending, the amount of dollars in the US economy is short. This situation gets even worse when we look globally. Since the USD is the reserve currency, it is needed across the world if we are to get economic growth. One of the problems with the US government running monthly deficits into the hundreds of billions of dollars is that bond sales pull in monies from outside the country. Thus when we pull in buyers like China and Saudi Arabia, dollars are moving back into the US banking system, furthering the problem.
With massive debt loads everywhere, there are only a few choices.
They are:
Austerity
Massive growth
Stay The Course
The first two are also in the land of flying elephants and purple bunnies. Politicians are not going to embrace austerity on any level. In fact, globally, they are all going the opposite direction with all amassing record debts and their Central Banks expanding their balance sheets to record levels.
As for growth, the last 15 years shows us that is anemic. Even when Trump was pounding his chest about the economy, which his policies did help grow, it was still only at 3%. For a technological era, that is pretty pathetic. Sadly, Japan and the EU are even worse and, the growth machine of the last 30 years, China, is slowing too.
So this leaves one option: keep doing what Central Banks all over the world were doing: easing. Recall, the ECB started during the Great Recession and never quit. They even went negative with their interest rate in 2014, something that continues to this day. Yet in spite of all that "stimulus", the growth rate is awful.
Of course, the Fed truly has no idea why its policies are failing. After all, why isn't long-term inflation going through the roof? You would think that $30 trillion worth of "money printing" would it. Recently inflationary fears are taking the headlines, something that Powell is well aware of. Even the Fed doesn't believe there is much in the way of long term sustained growth.
This is their projections over the next couple years.
In other words, the Fed's own forecast is that this is as good as it gets. It is only downhill from here. This runs counter to what we hear the media and politicians espousing. From those sources, we are told that the economy is going to be on fire as things open up. It seems that might not be the case.
Of course, it is vital to understand that what we are seeing is a recovery, not an economic expansion. We are still far below the levels we were at economically when COVID lockdowns hit. Quite frankly, it does not appear we are going to get back there either.
The undeniable fact is that, barring more action, the direct stimulus, is going to run out. Starting this month, many states are ending the expanded Federal unemployment. Even those that continue, they see it running out come August or September. That means people are going to have less money to spend.
What happens when people have less money to spend? What does that do to things economically? The answer is things slow down. We still have a large number of people out of work and the wages, as tracked by the Atlanta Fed, are starting to slow. So those that are working are finding their monetary situation is stalling.
So what is Jerome to do when faced with a slowing economy which likely also has some negative impacts in the equities market? Do we think for a second that Yellen won't be bringing over a couple hundred billion dollars in Treasuries each month to sell? Nobody in their right mind believes the government spending train is going to ease off the pedal anytime soon.
Hence, Powell is going to do what he has been doing. There is no way the Fed tightens and risks destroying the economy or the market. It is likely to happen based upon the circumstances we are in yet he is not about the be the cause of that, at least directly.
The discussion about having a meeting to discuss a meeting about the prospect of tightening is his way of saying, "we are staying the course".
He knows very well that by this time next quarter, things are going to be very different.
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