Betting On Jerome Powell’s Smarts Is Getting Too Crowded

Investors here in Asia are proving to be as susceptible to the most crowded trade in global bond markets as anyone.

The reference here is markets’ belief the Federal Reserve Chairman Jerome Powell and his colleagues know what they’re doing. It’s a completely open question as punters wager that after 18 months of aggressive tightening, Powell & Co. will be slashing rates—a lot.

Global debt markets are about to rack up a record two-month rally on the assumption that the Fed and other central banks will ease as aggressively as they hiked rates these last couple of years.

A reasonable assumption? It depends.

The Powell Fed, it seems, has been more lucky than right. The Fed is fortunate that inflation is easing as 2024 beckons. And sure, one can argue 11 rate hikes in less than 20 months tamed the worst U.S. inflation in 40 years.

But this ignores Powell’s culpability for the magnitude of the inflation surge to begin with. In 2019, remember, the Powell Fed was cutting rates at a moment when the economy didn’t need it.

Given the chaos of the last few years, it’s easy to forget how Powell caved in to former President Donald Trump. In 2019, Trump was livid that the Fed was normalizing rates on his watch. After Trump publicly threatened to fire him, Powell’s team began slashing rates in ways that dented the Fed’s credibility.

Hamas fighters hold a Palestinian flag as they destroy an Israeli tank in Gaza City, Gaza on October 07, 2023. The Israel-Gaza crisis has the potential to expand into a region-wide conflict. 

They include the Israel-Gaza crisis expanding into a region-wide conflagration; Russia intensifying its Ukraine invasion; another Covid wave that slams global supply chains; and stronger-than-expected global growth.