Making Hay Monday - July 21st, 2025
Mr. Powell Exits Washington?
Mr. Powell Exits Washington?
“The prospect of a subservient, dovish Fed in 2026 would imply Easy Monetary + Easy Fiscal…in other words, Debasement AND Run It Hot which is simply the worst of all worlds for bondholders (inflation + growth impulse)...no wonder the ‘white metals” silver, platinum, palladium, etc are running white hot right now.” -PauloMacro, July 18th, 2025
As I often note, life is full of ironies. One that could rank right up there among the stranger twists of fate would be if Jay Powell’s current hawkish monetary policy led to the unprecedented firing of the chairman of America’s Federal Reserve Board.
For most of his nearly 7½-year tenure as Fed head, Mr. Powell has been much more of a dove than a hawk. Proof positive of that is the S&P 500’s performance during his chairmanship. It has produced a total return of approximately 150% since Mr. Powell took over from another uber-dove, Janet Yellen. If you need more such evidence, gold is up almost an identical amount during the Powell era.
For those Haymaker readers with a keen memory, you may recall that there was a prior instance when Mr. Powell changed his spots… or, more appropriately, his feathers. The setting was 2018 during Donald Trump’s first White House tour. After years of ultra-easy monetary policies in the wake of the Great Recession/Global Financial Crisis — including multiple iterations of quantitative easing (QE) and essentially zero short-term interest rates — Mr. Powell attempted to play tough.
Janet Yellen had started to take away the Fed’s proverbial (and overflowing) punch bowl in 2017 by raising rates three times, all the way up to — drum roll please — 1⅜%. She also began to timidly shrink the Fed’s balance sheet that had risen to Himalayan heights during the Fed’s launches of its monetary ocean liners: QE 1, QE 2, and QE 3. The latter was started in 2012 but was open-ended; i.e., it had no termination date. This caused some wisenheimers, like me, to refer to it as “From Here to QEternity”.
Throughout 2018, Mr. Powell kept raising rates and pulling out some of the trillions of fabricated money the Fed had created via QEs 1 through 3. He raised the fed funds rate four times during that year, hitting the punily punitive rate of 2⅜% as 2018 was ending. His balance sheet shrinkage, QT, peaked at $50 billion/month in October of that year. Between 2017 and 2018, the Fed’s balance sheet fell by $500 billion. Yet, until autumn 2018, the Fed’s first ever double-tightening – raising rates and selling, rather than buying bonds (QT, the opposite of QE) – didn’t ruffle the market’s feathers.
By the end of October, though, the stock market began to wobble. It would continue to do so through Christmas Eve 2018, leaving it lower by nearly 20%. Mr. Powell didn’t help matters by saying on December 19th that the tightening process was on autopilot. As stocks tumbled another 6% over the next few trading sessions, Mr. Powell flipped off the autopilot switch right after Christmas, triggering a powerful rally.
Thus ended his (brief) Jayhawk experience.
Unsurprisingly, Donald Trump was not a fan of Mr. Powell’s fleeting flirtation with sound money policies. After ignoring the double-tightening in 2017 and the first half of 2018, he began to rage against the Fed. By November, he was calling the mild-mannered Mr. Powell “an even bigger threat than China”. He continued his fusillade against Mr. Powell even as the Fed chairman was cutting rates three times in 2019. The former Jayhawk also halted QT in July of that year. Yet, the attacks persisted until Covid reared its frightful head in February 2020.
Once again it was no surprise that after Covid struck, Powell & Co. went into maximum easing mode. Because of its earlier reductions, the fed funds rate was only 1⅝%. Thus, it didn’t have all that much room on the downside, at least not without resorting to negative rates such as were prevalent in Europe.
Yet another non-surprise was that Mr. Trump had been cajoling for the Fed to go European (“Why can’t we have those?”). Consequently, once rates were down to near zero, the Fed needed to restart its “Magical Money Machine”, or MMM, as I have often referred to its QE apparatus. But it then pulled out the ultimate bazooka, one that I had previously anticipated (to much derision): It announced the purchase of corporate bonds using fabricated money; aka, its MMM.
This caused both the corporate debt and equity markets to go postal on March 23rd, 2020, despite that Covid lockdowns were becoming increasingly draconian. Stocks and corporate bonds never looked back, and at that point Mr. Trump was too distracted by the pandemic to continue harassing Jay Powell.
Today, of course, the Fed chair is once again in Donald Trump’s crosshairs. Allusions of corruption (imagine that in Washington, DC!) are even being aimed at Mr. Powell for cost overruns on the Fed’s HQ renovations. Cynics have dubbed it the “Fed Mahal” and its heavily marbleized construction, along with other lavish features, has reportedly led to it being $700 billion north of its budget*. Obviously, the Fed is being held to a much different standard than, say, the Pentagon… or Mr. Trump’s own budget record.
*Per the Wall Street Journal, its cost is roughly in line with the inflation-adjusted price tag of Louis XIV’s Versailles.
A Fed chair has never been fired, but that’s not stopping the present POTUS from loudly threatening to do so. More probable is the installment of a “shadow” Fed head – of his own choosing, of course – who will accelerate the easing process Mr. Powell started last year when the Fed slashed rates by a full percentage point during the last four months of 2024.
Unquestionably, Mr. Powell presided over an aggressive tightening campaign but he did so both belatedly and reluctantly. The first double-digit U.S. inflation experience since the early 1980s forced him into his second Jayhawk role. The fact of the matter is that the Fed started easing irrespective of inflation running well above its 2% target. Actually, as we all know, it still is. (The elder Haymaker is still smarting from a nearly $500 dinner tab to celebrate his and Mrs. Haymaker’s 48th wedding anniversary – and that was in Spokane – despite ordering a small steak and one of the “cheapest” bottles of wine on the menu.)
The fact pattern is now quite clear that, regardless of Mr. Powell’s resistance, much easier money is in the hopper. He can delay the process, but markets are almost certain to price in an even more dovish Fed chair than him. In point of fact, they already are as evidenced by Bitcoin touching $120,000 per coin, the S&P and the NASDAQ at all-time highs, and commodities joining the party.
Another notable irony is that Mr. Trump’s Treasury Secretary, Scott Bessent, routinely criticized his predecessor, the aforementioned Janet Yellen, for heavily relying on T-bill issuance to fund the enormous Biden era deficits. Yet, after a brief fall off, those are accelerating again under the Trump administration.
The ongoing $2 trillion or so of scarlet ink is making a mockery of the DOGE-y attempts at austerity earlier this year. Any illusions that Team Trump is going to emulate the “no pain, no gain” playbook of Argentina’s Javier Milei have been thoroughly shattered.
But as my wife likes to say, don’t get mad, get even (she is, after all, of Irish descent). If short rates are going to be forced down to 1% or 2% — i.e., below the inflation rate – there will be some serious money made… and lost. The latter is highly likely to include long-term Treasury notes and bonds.
This might seem counterintuitive; lower rates should be salubrious for bonds. At the short-end, they almost certainly will be, but the long end is a different story. For example, when the erstwhile Jayhawk knocked the fed funds rate down by 100 basis points (1%) last year, yields on the 10-year T-note and the 30-year T-bond rose sharply.
The latter seems to be in a particularly perilous position presently, as you can see below.