Federal Reserve Chair Jerome Powell last week held sacred the Fed’s “precious” independence, but he apparently forgot how quickly and easily it’s been bullied into altering its monetary policy by both politicians and influential financial markets people.
Until just a couple of months ago, the Fed was determined to “normalize” interest rates and its enormous balance sheet. But after a relative – emphasis on that word – weak patch for the economy and howls of pain from investors during last year’s correction, the Powell Fed was lighting quick to reverse course and put a halt to more rate hikes and portfolio runoff until further notice.
Not surprisingly, the financial press hasn’t given President Trump any credit for this (if credit is the right word in this instance), even though he was clearly the first and loudest basher of tightening Fed policy. Wall Street then jumped on the bandwagon, and voila, we have a new “patient” Fed and an easier monetary policy – and the best January for stocks since the 1980s.
Powell and other members of the Fed have tried to justify their abrupt about-face by noting recent weak – again, relatively speaking – economic data. But January’s robust nonfarm payrolls report – nearly double the consensus forecast – calls that into serious question.
While there has certainly been lots of data indicating that economic growth has come down off its peak, was that enough to justify such a swift change in policy? After all, third-quarter GDP growth “slowed” to 3.4% from the second quarter’s 4.2% rate, and was expected to slip further below 3% in the fourth quarter. Other indicators also pointed downward. Yet that was apparently sufficient for many analysts and prognosticators to start throwing around the “R” word – recession – when we’re not even remotely close to such a scenario, as the jobs number showed.
So what exactly is the Fed trying to protect – the economy, as Powell maintains, or investor profits?
Last I looked, and the last time I heard Powell speak, the Fed’s sole concern is the U.S. economy. As its Congressional mandate says, it’s responsible for maximizing employment, low and stable inflation, and moderate long-term interest rates. How much credit the Fed deserves for it is debatable, but I think we have to agree that all of those objectives have been achieved, and then some.
Powell himself said last week that “the U.S. economy is now in a good place. At the moment, unemployment is low, prices are near two percent inflation, so we’re in a good place now.”
Quite clearly, as the January jobs report demonstrated, we are either at maximum employment or pretty darn close to it, whether or not the economy, in general, pulled back a little at the end of the year. Inflation – though I’ve always argued that it’s way understated – is certainly “low and stable,” even more so since oil prices have dropped sharply and show few signs of climbing higher as long as the big producers want to keep pumping even more. And long-term interest rates are way beyond “moderate” – they are practically rock-bottom. Last week the yield on the bellwether 10-year Treasury note closed at 2.62%, more than 60 basis points below its early November peak.
Some would argue that that low 10-year note rate is signaling recession. Yet at the same time, the employment figures are saying the exact opposite.
I would argue that in some people’s minds, the idea of a looming recession is almost wishful thinking.
After 10 years of super-low interest rates, investors have become addicted to them, and will seemingly do anything to keep the fix flowing, whether it’s by claiming that a recession is right around the corner, or arguing that even small, methodical, well-telegraphed rate increases will throw the economy and the markets off kilter.
If the Fed really does want to assert its “precious” independence, it should get on with honoring its mandate, not succumbing to verbal pressure from Wall Street.
Several members of the Fed – Neel Kashkari of the Minneapolis Fed and James Bullard of the St. Louis Fed, most prominently – have been consistent in maintaining that interest rates still need to be kept at recessionary levels. While I disagree, they’ve been constant in their belief. The others, led by Powell, have been more fickle.
Some would argue that they’re simply being more “flexible” in responding to changing economic data. Others might contend that they’re allowing investors and politicians to influence monetary policy.
Last week the Wall Street Journal released the results of a survey of economists in which Powell was given an average grade of B-minus for his first year in office. That was below the B-plus grade his immediate predecessors, Ben Bernanke and Janet Yellen received.
One of the reasons for Powell’s lower grade was his failures in communication. As Scott Anderson of Bank of the West commented, “His inconsistent communications on future rate hikes gave traders and economist[s] whiplash and was an important reason for the stock-market selloff in the fourth quarter.”
Powell has said that Fed policy is not on a “predetermined course.” Fine. But a little more consistency would be in order if we’re to believe the Fed is really serious about following its mandate and not simply what’s best for some investors.
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George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
