Pre-Emptive Fed Strikes + Having It Both Ways

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Summary

The two main objectives of the Fed’s mandate are stable prices and maximum sustainable employment.

All else being equal, the Fed will sacrifice employment if inflation rears its ugly head.

The 2.1% Treasury is a sign of potential economic troubles ahead.

Now, even more ridiculous in light of this recent substantial drop in rates, there are calls for the Fed to take rates even lower.

Originally published on June 6, 2019

Dumb and Dumber

Just when you thought media/pundit commentary on the market and the economy couldn’t get anymore inane and stupid, they surprise you by plumbing a new depth. This article from CNBC, “These charts show how Fed Chair Jerome Powell is the most important thing to the market now,” is a solid gold example. Of course, Chairman Powell is in part responsible for this belief with his statement yesterday, “We will act as appropriate to sustain the expansion.” That comment was all it took to reinforce the opinion of those believing in a phantom “third mandate” for the Fed… keep the economy growing at all times (i.e., no slowdowns, no recessions or, even worse, no depressions)… A brave new world of pre-emptive (Fed strikes) rate hikes. Unfortunately (or fortunately), there is not third mandate. The mandate’s two main objectives are stable prices and maximum sustainable employment. All else being equal, the Fed will sacrifice employment if inflation rears its ugly head.

But, you say, inflation hasn’t reared its ugly head for years. That is true, but the Fed does not want to do anything that might trigger that process… things like printing more money or keeping rates so low as to encourage speculation and bubbles. By the way, money printing and low rates have been the hallmarks of Fed policy for most of the past decade following the financial crisis. Fiscal policy, including our most recent tax cuts and the additional deficits incurred because them, are very expansionary (again, potentially inflationary).

Specifically, as it pertains to rate cuts, our president has done a yeoman’s job in cutting rates with no help from the Fed. Trade and tariff issues with China and Mexico have driven the yield on the US Treasury 10-year note to nearly a two-year low (down over 1% – 3.24% down to 2.12% as of this post since last November). That 10-year is the benchmark used to set mortgage rates, very important for housing.

Fed policy and rates are not the problem. As such, I believe it is dumb to think Jerome Powell can save us from the economic and stock market impact of trade policy/immigration policy by tweet. It is even dumber for anyone to proclaim that the Fed Chairman is “the most important thing to the market now.”

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