US Federal Reserve Chair Jerome Powell often repeats the phrase “We are data-dependent.” It’s meant to assure the public that the central bank’s actions are guided by hard evidence, not political or market pressure. Yet, as Dr Komal Sri-Kumar, President of Sri-Kumar Global Strategies and a veteran economist who advises multinational investors and sovereign wealth funds, observes, the Fed’s behaviour increasingly suggests the opposite.
“At the National Association for Business Economics conference in Philadelphia, Powell indicated that the Fed would be making decisions despite an official data blackout caused by the ongoing government shutdown,” says Dr Sri-Kumar, President of Sri-Kumar Global Strategies. “Even with delayed inflation figures showing prices rising again, the Fed looks set to cut rates yet again on Wednesday. Data be damned.”
The US government shutdown, now in its fourth week, has disrupted economic reporting. Yet markets overwhelmingly expect another rate cut. The Fed, Dr Sri-Kumar argues, is now “cornered by expectations.” Failing to cut could trigger turmoil in equities and bonds. “The Fed is no longer leading the markets,” he says. “It is following them.”
The real danger, he warns, lies beneath the surface. “The most likely spark for the next crisis could come from the high-yield market where credit spreads have been unusually tight even as credit has flowed freely,” he notes. “Recent bankruptcies at First Brands and Tricolor are early signs of strain.”
The banking system, too, is showing stress. “Bank reserves are no longer ‘abundant’—Fedspeak for a looming cash shortage,” Dr Sri-Kumar writes. He draws parallels with September 2019, when a sudden liquidity crunch forced the Fed to abandon balance-sheet tightening. “Given how much looser credit conditions are today, a similar squeeze could be even worse.”
Powell’s remarks hint at an imminent end to Quantitative Tightening, despite the Fed’s balance sheet still exceeding pre-COVID levels both in dollars and as a share of GDP. “Every time there is a crisis, the Fed becomes a bigger part of the economy,” says Dr Sri-Kumar. “What began as a temporary response in 2008 has grown into a permanent dependency.”
That dependency has come at a cost. “Such bureaucratic overreach may be useful in Washington as a power-grabbing tool but does little to maintain stable markets,” he writes. “It distracts the Fed from its core mission—keeping inflation low and stable.”
Dr Sri-Kumar says: “In my next life, I’d like to be born as the Federal Reserve. That way, I can claim total independence, remain untethered from reality, and never have to worry about the consequences of my actions.”
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