The market doesn't believe we're losing Fed independence, says Invesco's Brian Levitt

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We're going to be hearing from a whole bunch of Fed officials later today. They're probably going to talk about where they think the economy's going. If you're the Fed speaker, what do you think is happening here?

speaker2

Brian Levitt

The Federal Reserve has already set up the market for interest rates to move to 3% by the end of the year. The market seems mostly willing to look past concerns about Fed legalities because we've largely set up the market to be prepared for a series of rate cuts this year.

So you think a lot of the hair on fire stuff in terms of market and Fed independence should be related or unrelated? What is your actual take on that?

speaker2

Brian Levitt

It should be very related. The big risk to the outlook is that if the market starts to get a sense Fed independence is going away, you'll see a rise in inflation expectations. If longer rates start to go up, valuations need to adjust. The market is already set up for rates to go lower.

What happens if Kevin Hassett becomes the Fed chair? Do you think that is Fed independence?

speaker2

Brian Levitt

We've seen people come from administrations to run the Fed, not directly. We'll have to see how Hassett acts in that role. Again, the good news is rates are already expected to go lower. What I'm telling investors is watch inflation expectations closely.

In every cycle, we maniacally watch something new. I think the three year break evens are telling you what you need to know.

Brian Levitt

The three year break evens were moving lower in an environment where the economy was likely to pick up - all a good sign. They moved higher probably in the 240 range on Monday. If that starts to break out, that's a problem. If that stays in that two and a quarter, two and a half range, then we're in a good spot for markets.

One of the reasons I think everyone talks about Fed independence in the context of, are they going to raise interest rates or lower interest rates? What's the market thinking this moment? That's not why Fed independence actually matters.

It matters actually when you have a problem, when you have a panic, when you have a crisis. In those moments, typically the Federal Reserve has to do things that are completely politically unpopular, unpalatable things that nobody wants them to do.

speaker2

When something terrible happens, if you don't have an independent Fed, you may have choices made that actually are demonstrably a problem.

speaker2

Brian Levitt

In some cases, the answer might actually be what Paul Volcker did, which was also politically unpopular. 2008 is an example of something that was politically unpopular in terms of 2020 as well. When there are acute moments, when the going gets tough, they're going to be decisions that typically have to get made that are terrible.

You've answered the criticizing Jay Powell, and that's where the political criticism of him comes in for not raising rates back when he should have.

speaker2

Brian Levitt

A lot of what American exceptionalism was all about and the strong US dollar were those responses to the last two crises. The United States did respond faster in 08 and 2020 than the rest of the world. What we have now is a bit of a different environment.

Brian Levitt

You have other central banks around the world that have already eased. And now you have a Federal Reserve that's going to be easing rates. We haven't seen this a long time. A gradual reduction in rates towards the rest of the world. It means weaker dollar. It doesn't mean a collapse in the dollar. It means for the first time in a while, we're in an environment where you open up opportunities for investors to do well outside of the United States.

Brian Levitt

The reason why I'm watching the inflation expectation so close. As soon as the three years started to break above two and a half percent and started rocketing above three, that's where you got a pretty significant sell off in markets. That's where the Fed was behind the curve.

Brian Levitt

In this instance right now again on Monday, we move from call two and a quarter to two, 40. That's a pretty big move. I would still categorize it as price stability.

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