Invest in a clue. Historically, the current rate is still VERY low. Once again, everything is a conspiracy with you people.
https://www.investors.com/politics/editorials/fed-rate-hike-boom/
Is The Fed Trying To Kill The Trump Boom?
Fed Policy: The Fed's decision to raise interest rates another quarter-point is more perplexing than anything, especially after remarks made by Fed chief Jerome Powell. The rate hike seems to fly in the face of the Fed's own dual mandate to keep inflation under control and maximize employment. Isn't that where we are now?
We've often been critical for the Fed — not out of some anti-central bank animus, but because it has so much power and, by design, very little direct accountability. Central banks, where they exist, should be independent. But with independence comes tremendous responsibility.
That's why we're left scratching our head over what the Fed has done. This week it raised rates a quarter-point to a 2.25%-2.5% range, presumably to take us closer to the "neutral rate" promised land. At the same time, it reduced the number of rate hikes it forecast for next year from three to two. Hallelujah!
But we have argued, and still do, that no hikes are needed at this time. Not only is the housing market topping, but the stock market is tanking. Energy prices are tumbling. President Trump's trade row with China hasn't helped, at least not the stock market. And the global economy is melting down fast.
Even so, the Fed has plowed ahead with rate hikes, seemingly oblivious to their impact.
Low Inflation, Low Unemployment
Let's review where we are: The Fed's preferred inflation measure, the personal consumption expenditures index, is running about 2% year over year. Smack dab on the Fed's target. But the Fed's Open Market Committee expects inflation to fall next year to 1.9%.
Given that the Fed has in the past usually overestimated inflation, we're not convinced inflation is a problem. At least not right now. If the data change, our minds will change too.
Meanwhile, as for unemployment, this is the best jobs market in decades. At 3.7%, it's a job-hunter's market. As we've noted before, unemployment and inflation do not correlate. So no real cause to raise rates just to push unemployment up. That's foolish Phillips-curve reductionism at its worst.
OK, but what about growth? The Fed thinks GDP will grow about 3% this year, a rate some economists believe is unsustainable. We don't agree, but it's open to debate. Still, next year it forecasts GDP growth dropping to just 2.3%, weaker even than its earlier estimate of 2.5%.
Did We Need A Rate Hike?
So we're supposed to believe that declining inflation and dramatically slower growth bolster the argument for three rate hikes?
The Fed's Powell has hinted it's near the "neutral" rate of interest. What would that be, exactly? No one really knows, since it's a moving target.
Yet, since Powell shocked markets on October 3 by saying that interest rates are "a long way" from neutral, the Dow Jones industrial average has fallen 13%, and other major gauges by similar amounts. The markets are doing what they always do: reassessing growth based on new information. The markets tell the story: They think the Fed is dismantling the Trump boom.
The Fed's Powell basically acknowledges the Fed's uncertainty: "There's significant uncertainty about the — both the path and the ultimate destination of any further rate increases," he said, in remarks after the Fed's Wednesday rate hike. "Inflation has remained just a touch below 2%. So I do think that gives the committee the ability to be patient in moving forward."
Torpedoing Growth
More Fed-speak. Would the "ability to be patient" include two more rate hikes next year after the one this week? Or one? Or none? Based on the best immediate growth bellwether we have, the stock market, more rate hikes won't be good for the economy.
We understand that this last decade has been an anomalous period in American monetary history. Nothing the Fed has ever done in the past quite matches holding interest rates at close to zero percent and buying government debt through quantitative easing. It was a multi-trillion dollar stimulus.
In the context of the financial crisis, either or both of those policies were understandable. But they were kept in place, largely we suspect, to boost the Obama administration. Despite record low rates during that entire administration, GDP growth averaged a puny 2% — well below historic norms.
Now, for the first time in years, the Fed is hiking rates just as the economy appears to be hitting a sweet spot, with 3%-plus growth, 2% productivity, sub-2% inflation, and sub-4% unemployment. Why end it?
We agree with Duquesne Family Office Chairman and CEO Stanley F. Druckenmiller and former Fed Board Member Kevin Warsh, who wrote earlier this week in the Wall Street Journal: "The time to be dovish was when the crisis struck and the economy needed extraordinary monetary accommodation. The time to be more hawkish was earlier in the decade, when the economic cycle had a long runway, the global economy ample momentum, and the future considerably more promise than peril."
Fed's Bad Record
No, we're not predicting a recession. We're not in the prediction business. But we can say this, for certain: Since World War II, every recession has been preceded by a series of Fed rate hikes. So at bare minimum, the Fed has significantly raised the chance of a downturn for President Trump — after keeping rates at record lows for the two terms of the previous president.
Sure, Trump has made a number of snarky, critical remarks about the Fed, even though Trump nominated Powell for the post. And Powell of course denies any political motivation for the rate move.
But we'd be surprised if at least some of the sub rosa rationale for this unneeded rate hike came from Powell and his Fed colleagues wanting to show markets they're independent of Trump. They won't be bullied. Hey, it worked for Paul Volcker and Alan Greenspan.
If so, here's a modest monetary proposal: How about a Fed-White House detente? Trump stops talking trash about the Fed, the Fed stops unnecessarily hiking interest rates, and average Americans get to keep their booming economy. Sounds like a deal.
