Powell’s Last Stand | Danielle DiMartino Booth on May Fed Meeting 2024

Episode Summary

Executive Summary: Daniel Demartino Booth argued Powell’s press conference marked a dovish pivot on rates and a slower, but continuing, QT path, while also signaling the Fed is now weighting labor-market weakness more heavily. Booth used alternative data, revisions, layoffs, and PMIs to argue the U.S. is already in recession and that official labor statistics overstate job growth. He also flagged rising insolvency risk, tightening credit, and major policy implications from Basel III and election-year politics.

Main Topics: Powell’s dovish pivot on rates (Priority: 5/5): Booth said Powell effectively removed a rate hike from the baseline and shifted markets toward expecting fewer cuts, though not necessarily near-term easing. Quantitative tightening slowdown, not a true dovish turn (Priority: 5/5): The Fed is reducing Treasury runoff while continuing QT via MBS, which Booth framed as a nuanced adjustment rather than a full policy easing. Labor market weakness hidden by official data (Priority: 5/5): Booth argued layoffs, revisions, and alternative indicators show the job market is weaker than BLS/ADP payroll figures suggest. Recession already underway (Priority: 5/5): Based on revisions, industrial data, income measures, and PMIs, Booth said the U.S. likely entered recession in October 2023 and remains in one. Credit stress, bankruptcies, and private markets (Priority: 4/5): He described worsening defaults, rising bankruptcies, and stress in private equity/private credit as higher-for-longer rates force restructuring. Regulatory backdrop: Basel III endgame and shadow banking (Priority: 4/5): Booth said Powell is also focused on restraining non-bank leverage, basis trades, and securitization through bank capital and clearing rules. Fiscal policy and election-year risk (Priority: 3/5): He argued future fiscal expansion could depend heavily on Senate control and could re-ignite inflation if large transfers resume.

Key Arguments: Powell’s statement that a rate hike is unlikely shifted market expectations materially and made the next move more likely a cut than a hike. The Fed is slowing Treasury QT because MBS runoff has lagged expectations, so total balance-sheet runoff may remain substantial. Alternative labor data—Indeed postings, Challenger layoffs, long-term unemployment, state tax receipts—suggest labor market deterioration well before the headline payroll data catch up. BLS payroll figures are inflated by survey methodology and birth-death assumptions; subsequent revisions can flip positive readings to negative. The U.S. likely entered recession around October 2023, and the recession may prove prolonged because policy remains restrictive. Private credit and private equity are being supported by temporary refinancing and accounting maneuvers, but defaults and restructurings are building underneath. Basel III endgame and treasury central clearing are intended to curb leverage in shadow banking, basis trades, and securitization. A Republican Senate would be the main constraint on another large fiscal-spending surge after the election.

Data Points: Treasury QT pace: $65B/month maximum, moving to $60B and then $25B - Powell’s balance-sheet runoff path for Treasuries was discussed as being slowed materially. Total QT runoff since June 2022: About $75B/month - Booth said the Fed has been running total runoff from Treasuries plus MBS around this level. MBS runoff pace: About $15B/month vs. $35B/month goal - He argued the Fed is behind on mortgage-backed securities runoff. Fed dot plot cuts: 3 cuts / 75 bps - The Fed’s starting-year projection was cited as being walked back by Powell. Market pricing for cuts: 1 to 2 cuts, around 1.5 cuts - The market moved from expecting many cuts to expecting far fewer. Unemployment trigger level: 4.0% - Booth said Powell’s internal trigger for action is now close to a 4.0% unemployment rate. Unemployment rate cited: 3.829% to 3.945% - He described the threshold as a small move to 4.0% rounding up. Layoff announcements in April 2024: 115,000 - He said April was unusually weak seasonally for announced layoffs. Layoffs Jan-Apr 2024: 370,000 - Compared with 334,000 in the same period of 2023, he said 2024 is worse. Layoffs Jan-Apr 2023: 334,000 - Prior-year comparison for announced layoffs. Worst layoffs since: 2009 - Excluding pandemic distortions, he said current layoffs are the worst since the financial crisis era. BLS third-quarter 2023 payroll revision: +640,000 to -192,000 - He used the revision to argue initial payroll gains were badly overstated. Establishment survey sample: ~700,000 establishments - Initial nonfarm payroll estimates were based on this survey sample. Hard payroll reports: 1.6 million employers - Final revisions use much broader mandatory employer reporting. Implied monthly job loss: ~60,000 jobs/month negative - He converted the revised Q3 2023 figure into a negative monthly average. Long-term unemployed share: 25.0% - Share of unemployed workers looking for work for six months or more, on average since March 2023. Indeed wage tracker peak: Double-digit wage inflation for least skilled workers - He cited this as evidence labor slack had been absorbed. Private-industry employment cost index: 5.5% peak, now 4.1% - Used to illustrate wage growth cooling. Government wages/salaries: Highest in 25 years - He said government pay is distorting the broader wage picture. Union wage growth: 6.3% in Q1 - He contrasted union gains with weaker private-sector wage growth. University of Michigan income expectations: 49% - Respondents saying their income will not keep up with inflation. Chicago PMI: 4 main indicators below 40 - Employment, production, new orders, and backlogs all signaled deep contraction. Commercial and industrial lending: Year-over-year negative - He treated negative C&I lending growth as another recession signal. Reverse repo facility: $534B - Mentioned in the context of money-market functioning and balance-sheet policy. 2038? no, 2025 QT end goal: End of 2025 - He said the Fed still intends to continue QT toward that terminal balance-sheet goal. Second-highest bankruptcies in a week: Second highest on record for a week in early April - Used to show restructuring stress is intensifying. S&P/market reaction: Stocks of private equity and cost-cutting firms at or near highs - He argued markets reward cost cuts and private credit growth despite underlying fragility.

Pivotal Quotes: "“We just had a big baton handoff from several years ... of focusing on the inflation mandate to switching gears back to more of a balance between the employment mandate and the inflation mandate.”" — Daniel Demartino Booth: His characterization of Powell’s post-meeting tone as a major policy pivot. "“The easy part of private credit is lending money. The harder part is getting it back.”" — Daniel Demartino Booth citing James Morrow: Used to summarize the coming stress in private credit and defaults. "“I think that until we see the whites of the eyes of a 4.0% unemployment rate ... we remain inverted.”" — Daniel Demartino Booth: His view on the yield curve and the threshold for a Fed pivot.

Implications: Listeners should expect a slower QT runoff, fewer rate cuts than the market once expected, and rising recession/default risk. The bigger issue is not easing but whether labor, credit, and fiscal policy deteriorate enough to force a sharper Fed response.