Next Stop on the Jay Powell Apology Tour

Obviously no rate hike Wednesday. A Wall Street Journal story Friday saying the Fed will announce a policy of higher-than-expected levels for the balance sheet creates a demand-effect on Powell, both to deliver a result in that dovish direction and, perhaps more important, to appear to have mastered the subject matter. We think the story was planted by Powell deliberately to give him a chance to show well on Wednesday. Even at today’s rate of run-off, the balance sheet won’t fall below $2.1 trillion, where it will converge with the amount of currency in circulation, in late 2022. But in the new regime of using interest on reserves as the main policy tool, the balance sheet should likely be larger, so that the there is a sufficient pool of assets on which the policy rate can operate. Talk along these lines will be very market-positive – that is, risk-on, higher stock prices, higher bond yields. If Powell misses this easy pitch that he has thrown to himself with this planted story, markets will be very unhappy until he is gone.