Moneybeat: Balancing act

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and adviser David Bahnsen. David heads up the wealth management firm The Bahnsen Group. He is here now. Good morning to you, David. It’s been too long, good to talk to you!

DAVID BAHNSEN, HOST: Good morning, Nick, good to be with you.

EICHER: David, Fed Chairman Jay Powell was in Wyoming for the annual Jackson Hole Symposium put on by the Kansas City Fed, and this year he suggested the Fed may finally be ready to ease interest rates. Translating the Fed-speak we’re about to hear, he points to inflation pressures on one side, job market weakness on the other, and hints it may be time to respond. Let’s listen.

POWELL: Risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now … closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.

So, again, in plainer terms, Powell seems to be saying the softening job market to his way of thinking outweighs any inflation pressures he's still seeing, so all that, his words: “may warrant” a change. Now, I’ve learned from you to look at the futures market for the real odds, not just the headlines and media speculation. But before he spoke, the market put a September cut at about 70% likely. Afterward, that jumped to nearly 90%. So run with this where you want, and if you'd like to talk about the interest rates, please do—but I do want to get to the heart of your Dividend Café argument this week about the bigger story of the Fed balance sheet, QE and QT. But we can start with interest rates.

BAHNSEN: Well, I think that there’s pretty much no question after the speech. And as you point out, Nick, the futures market reaffirming that we’re getting a rate cut in September. You know, 70% is not 90%—we should point out it was basically near 100% about 10 days before, and then that number fell after the hot PPI number that we had discussed last week, and so there was some ambiguity.

But I think that the market response to Jay Powell’s speech on Friday was a lot less about the September assurance, which, even though it wasn’t as assured, it was pretty assured already that we were headed to a rate cut in September. The bigger issue was the posture, the language, the concessions that he gave were all pretty directionally on the dovish side.

You know, we now have to think more about the other way, and getting in front of what could be economic softness. I think it was some of the weakening of the labor data that he’s kind of referencing. And even apart from the futures market in the Fed funds rate, which is what the futures are telling you the rates will go to into the future, the current bond rates on Friday dropped significantly.

So all that to say, when you kind of filter through the different numbers out there, the thing that sticks out to me the most is that we are in the futures market at a much higher forecast for three rate cuts by the end of the year. And that’s the more aggressive side. It’s not an assured thing you’ll have that much. But I do believe that the general posture that the chairman took in Jackson Hole gave people the indication that he’s now in—you know, singing from a different hymnal than he’s been the last couple of months.

EICHER: All right, David well, of course I mentioned yet another hymnal, so to speak, not just the interest rate policy tool but the balance sheet policy tool that you laid out in this week’s DC. Meaning quantitative easing versus quantitative tightening, we’ve heard a little bit about that, and you make the point that that policy toolset is just as important. Could you walk us through why that is such a big deal? Go ahead and take the time you need.

BAHNSEN: Well, the Dividend Café on Friday was a bit wonkier than normal because the whole terminology of quantitative easing, quantitative tightening, the Fed doing asset purchases on its balance sheet. You know, I just said five or six things that might have tuned out, you know, half of our listeners. And I hope that’s not true, but I don’t mean it to get into a deep dive of certain monetary, economic concepts. It’s to indicate that there’s this other really significant tool in the toolbox of our central bank that has been one of the primary uses of either affecting easing monetary conditions, trying to pump more credit growth, or tightening monetary conditions, trying to limit liquidity in the financial system—going back now, what is 17 years since the financial crisis and all of this began.

So I walked through the history of how all of that played out under then Chairman Ben Bernanke after the financial crisis. And the point that I am trying to make is that the interest rate the Fed uses is a big tool. But while we’re sitting around wondering, are they going to cut or not cut, they’ve still been tightening monetary policy by continuing to pull liquidity out of the financial system.

And there was over $2 trillion in what is called the Fed’s reverse repo facility a few years ago. It’s now empty. There’s nothing left there. So when they do quantitative tightening now, they’re pulling money out of bank excess reserves, which is literally reducing money in the banking system. And then when you factor in leverage off of money lent out, then that amounts to a pretty significant reduction of liquidity of credit in the financial system. And I think that the Fed at this point is very, very likely to be done with quantitative tightening.

Now, the interest rate has been the biggest monetary policy tool for decades, and then after the financial crisis, to try to kick it up a notch, they used this thing called quantitative easing using their balance sheet—the thing I just got done talking about. The issue, I would say, is when you’ve now exhausted two different policy tools and the market is already aware of it, what is the next thing you could do?

I’m not talking about a recession, Nick, but if there were a slowdown of economic conditions and the Fed decided they wanted to stimulate, what is the most likely tool they would use at this point? I think it would be reducing the interest they pay on the reserves that banks hold at the Fed. Right now, they’re paying an attractive rate of interest, and that gives the banks incentive to hold deposits at the Fed and not lend it out. And if they were to reduce that rate, that would probably become a more aggressive monetary policy tool.

So we’re living in an era, and I’ve been trying my best to study it for a good portion of my adult life. I think I lack the adventurism of central bankers to keep up with how aggressive they’re willing to be. But this is the story playing out—central banks from Japan to the United States to Europe being way more aggressive, way more experimental than they’ve ever been, and not really fearing the consequences. Pretty okay with the idea that, “Oh, we’ll see what happens here.” That, to me, is extremely noteworthy.

EICHER: All right, well speaking of adventures at the Fed, let's talk succession. Chairman Powell's term is coming to an end, and we're starting to hear some names floated—Chris Waller, Kevin Hassett, Kevin Warsh, Stephen Mirren. What do you make of that conversation? And what does it tell us about the future direction of the Fed?

BAHNSEN: Well, I really hope from that list, it’s Kevin Warsh. I believe it should be, and I do think that he has the highest odds of those four, but I don’t think those odds are above 50%. I mean, the President’s holding this close to the vest. There’s no question that Scott Besant, the Treasury Secretary, is going to play a big role in advising the President.

Kevin Hassett, I continue to question if I think he really would want the job for, you know, various reasons. I would prefer it not be Steven Mirren. And then, you know, Waller is definitely in the mix at this point, and he’s on the Fed now, and there would be the most continuity there.

The advantage he has is that he’s interviewed very well for the position by going out in the press and criticizing Jay Powell a lot and saying all the things President Trump wants to hear. The thing he has going against him is President Trump doesn’t know him. And President Trump has really said privately, including to some people I know, that he doesn’t want to do what he believes was a mistake again, which is go off of other people’s recommendations.

Then the Treasury Secretary, Steve Mnuchin, recommended Jay Powell. President Trump didn’t know him, and he ended up regretting that decision. And Waller may be in that camp where he’s saying the right things, but Trump doesn’t know him. He knows Kevin Hassett and and he knows Stephen Mirren now, but Warsh he’s interviewed several times.

Warsh was in the mix in the first term as well. But there’s, there’s a lot of talk as to whether or not the President is comfortable. Warsh is probably the best of those four. That’s what I’ll say.

EICHER: Well David, before we let you go, I want to let the WORLD Radio listening audience know about plans we have for three weeks from tonight, Monday, September 15th. If you live in or near Houston, Texas, we’d love to meet you. David and I, along with members of the WORLD team, will be there as we launch a new live event series we’re calling The WORLD Stage.

We’ve asked David to speak on the theological themes that are so close to his heart—ideas he explored in his newest book, Full Time: Work and the Meaning of Life. After a short speech from David, we’ll have a Q&A on stage, then take questions from you in our audience. And when the formal program wraps up, David will hang around so we can all visit informally.

It’s shaping up to be an exciting evening of ideas, encouragement, and fellowship. We hope you’ll join us at First Baptist Houston, downtown. Space is limited, so reserve your spot today at WNG.org/TheWORLDStage.

And here’s something fun—David and I have been friends for years now over our virtual studio line, but this will actually be the very first time we’ve met in person. So we’re looking forward to that part, too.

BAHNSEN: Well, I’m looking forward to it. I think that you know this to be true, and I know it, but it may be funny for listeners to hear, but it’s a real—when you see someone on a video screen and do this every single week, as we have, it really doesn’t feel like we’ve never met.

But it will be, it will be good to meet in person and and to meet a lot of other WORLD listeners, and be able to to be part of that community. It’s going to be fun. And so look forward to being with everyone in Houston.

EICHER: Again, WNG.org/TheWORLDStage, there’s no charge, but there is economic scarcity here because space is limited and you’ll want to sign up fast. Three weeks from tonight, September 15th, meet David Bahnsen, taking to The WORLD Stage. We’ll link to the event page in today’s transcript.

All right, David Bahnsen is founder, managing partner, and chief investment officer at The Bahnsen Group. He writes regularly for WORLD Opinions, and at dividend-cafe.com. David, thanks.

BAHNSEN: See you next week.

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