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Will Fed Take Away The Punch Bowl?

Jobs: You’d have to be a hermit not to know that this is the best jobs-economy in nearly half a century, following two years of booming growth. President Trump’s tax cuts and deregulation worked like a charm. Even dormant wage growth has revived. The big question is, will the Fed now raise rates to make it all go away?




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No, we’re not anti-Fed. But the central bank has a history of moving aggressively to tamp down good times out of fear that inflation will suddenly rear its ugly head. The late Fed Chairman William McChesney Martin famously said the Fed’s job was “to take away the punch bowl just as the party gets going.”

Many market watchers were confused Thursday when financial markets tumbled. Was it the Kavanaugh nomination? Trump tariffs? Actually, neither. Rather, the trigger was incoming data suggesting that the economy was strengthening. Markets knew that the growth-averse Fed will now almost certainly raise rates in December. Before, it was only considered a possibility.

The good news is that even a Fed rate hike in December likely won’t kill the economy. The U.S. kept interest rates at zero percent during President Obama’s time in office. It also spent trillions of dollars on quantitative easing to boost the economy. Fed economists and policymakers knew, though they couldn’t say it, that Obama’s economic growth policies wouldn’t work.

Then came Trump. As we said, his tax cuts and deregulation moves set the economy on fire. We’re now growing at a 3%-plus rate, a pace many conventional economists said was impossible. As we now know, it’s not.

Powell Gets Giddy

In comments last week, Fed chief Jerome Powell sounded uncharacteristically giddy, saying “there’s really no reason to think that this cycle can’t continue for some time, effectively indefinitely.”

But he also admitted to losing sleep over what could go wrong. As he said, “we’re pretty close to full employment.” With central bankers, gloomy always wins over giddy.

Powell and others at the Fed fear that the current unemployment level of 3.7%, the lowest since December 1969, will set off “wage inflation” as labor markets tighten. But there’s no sign of that. In September, wages rose 2.8% year over year, down from 2.9% in August. Besides, there’s really no such thing as “wage inflation” anyway. Higher wages are merely a revaluing of one input, labor, over another, such as machinery, robots or raw materials.

Yet, as we’ve noted before, an inflation-panicked Federal Reserve jacked up interest rates before all 12 of the post-World War II recessions. Will this time be the exception?

For the punch bowl to stay out, as Powell suggests it can, the bank must delicately tiptoe back to the interest rate level most Fed economists believe is “neutral”: a fed funds rate of about 3%. Last month the Fed raised rates a quarter-point to 2%-2-1/4%. It’ll hike again in December. That will put the rate at 2.5%. How much higher will it go? Is the Fed’s estimate of 3% as “neutral” accurate? Higher? Lower? No one knows, and that’s the problem. Mr. Powell, tread softly.

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