FOMC Preview: The Meh-stro

The scorched-earth policy tightening of the Powell Fed has precipitated a banking crisis that now demands a crisis response. Powell is a poor Fed chair in normal times, but he proved strong in the pandemic crisis. He styled inflation as a crisis to preserve credibility, but it never was – and now that has led to a real crisis. Can Powell address this crisis, given that he himself caused it? Volcker is a poor exemplar now – Greenspan should be Powell’s model. The Maestro deftly handled the 1987 crash despite a backdrop of rising inflation, and, most similar to today’s crisis dynamics, the LTCM collapse of 1998. Our bet is that Powell will pause Wednesday; this would be a modest upside surprise and would mark the end of this hiking cycle. With inflation falling anyway, that would launch a significant risk-back-on rally. Hiking in the name of showing confidence would be a mistake – confidence can only be restored by realistic action, not denial.