The Fed 'shouldn't be using forward guidance,' says Ironsides Macroeconomics' Barry Knapp

Many reasons. They might be thinking about doing a a bit of a pivot here, but let’s debate it all. Joining me now, Barry Nap is director of research at Ironsides Macro. Paul Mcculley is former chief economist at PIMCO and currently an adjunct professor at Georgetown’s McDonough School of Business and CNBC. Senior economic supporter Steve Liesman is here as well. Welcome to all of you. It’s a pleasure. Steve, kick kick things off for us. I mean, it’s what we all know that to his credit, Druckenmiller has had some of these criticisms for some time. But like he said, more and more people are talking about the fiscal piece of this. And do you think the feds trying to help their their brothers out? Let me preface this by saying I think Stan is one of the smartest guys on the street out there. I disagree with him a little bit because there’s a supposition in his comment that the inflation we saw at the beginning of this year was caused by the loosening of financial conditions at the end of last year. I think there may have been a piece of that, but I think there were other things in train, things like the motor vehicle insurance was a catch up of the motor vehicle insurance business to the tremendous rise in the cost of automobiles that happened. There were other things that were beginning of the year. Look, there may be inflation to come from that loosening of financial conditions. I’m just not sure that what we’ve seen is from that thing. So I just want to sort of stop there and say I’m not sure I agree with the underlying premise of Stan’s analysis. Well, it is impressive though or surprising, I guess you could say, Paul, that the economy is doing what it is, it’s holding up. And I and I think from that alone you’d think, OK, there’s probably more inflationary pressure than you might have thought. If we are already, we’re kind of going sideways, we’re living in a post pandemic world. We’re going to get surprised a great deal of the time. I think that we’ve had great disinflation success over the last year. That’s unambiguous. But as Steve said, we still have the residual fumes of the pandemic and that’s not directly related to what happens to financial conditions in real time. So I actually agree with Stan, but I think that the Fed has become a little bit too transparent, too much like a desk economist, if you will, in constant commentary. So I’d agree with him on that. But I don’t think that Chair Powell made a material mistake at all back in December with the rhetorical pivot. It was time for him to do that. Could he have done it a little bit more suddenly? Yeah, But it was important for him to do that. I wonder not to go on a sidetrack, Barry, but the part of and what Paul’s talking about is the druckenmiller was pointing out pointing Kevin Warsh’s past comments and saying maybe we need to get rid of forward guidance. I don’t know if you think that’s a friend or a foe of the feds, or if that’s even something that matters so much right now. Should they be still talking about doing cuts here or not? Forward guidance was a tool that was constructed when we were at the 0 lower bound to try and flatten the curve and find ways to deal with being at the effect of lower bound, just like asset purchases were. However, and and and from all accounts when we moved substantially away from the 0 lower bound, we were going to abandon those tools. Well, I was adamant from the beginning of this tightening cycle that because the majority of easing was executed through the balance sheet that they should not be passive with respect to unwinding the balance sheet. They should have used the opportunity to sell mortgage mortgages outright. They should still be doing that. They shouldn’t be using forward guidance anymore. They shouldn’t have relied only on the rate policy that would have prevented the deepest yield curve inversion since the Volcker era. So yeah, no, I I would absolutely agree with with Stan on forward guidance or Larry Summers for that matter that say that, you know, this is a tool that shouldn’t be utilized right now. So where are you in general on, on rate cuts though? I mean, necessary, not necessary. Well, I did think that we’re going to get the rate cuts. I think what was really important, you started out, Kel, by talking about why did this whole pivot occur. Recall that we had gone to 5% on 10s and 2 1/2 percent on 10 year real rates by late October. The Treasury took substantial steps issuing more bills, fewer notes and bonds to try and stabilize the back end of the market. And the Fed pivoted and changed their bias you know at least in the back of their mind to try and stabilize things. They did took smaller steps but took more steps again. Last week they had a bigger than advertised or pre announced a cut in the redemptions QT from 60 billion to you know to 25. They said they were going to do 30 in the minutes and the treasury is doing larger buybacks and off the run stuff. They’re still issuing more T-bills than the T back recommended. So this is still about stabilizing the back end of the market and you know I I think that’s at the core. Ultimately I think that something will break either in the labor market or in the financial system that will get them to tighten. This will not be a excuse me to ease. This will not be an easing because they can. My expectation that they go three times this year is because they will be forced. That’s really interesting. And as we’re starting to tiptoe into this and what you said about helping out the the back end of the curve is kind of what Druckenmiller said differently, which is they got to stop trying to, to help the Treasury out.