The Federal Reserve has gone somewhat off the grid and is becoming increasingly more stealth in regard to monetary policy. The Fed undoubtedly realizes what uncertainty with regard to interest rates can do to both the credit and equity markets. As such, you might want to buckle your seatbelts and hold on for the ride as we head into the new year.
President Trump has had nothing but disdain for the Fed and his chairman Jerome Powell. In response, Powell said the U.S. economy “Is in such a good place right now” and credited monetary policy for helping to engineer that growth. Here is the part that is hard to swallow. Speaking at the Dallas Fed Global Perspectives event, Powell cautioned markets that every Fed meeting from now on will be “live” for the possibility of an interest rate hike.
The magical place for rates to live right now is in “neutral rate” land, which is an estimated range that neither provides stimulus nor slows growth. Vice Chairman Richard Clarida and Chairman Powell believe we are just below this place. Regardless, you still face the same deleterious consequences if you miss that target range on either the high or low side. Overshooting it risks a recession at a time when the central bank is already under intense criticism from President Trump. Missing to the downside could unleash asset bubbles that could wreak havoc on the economy.
In an attempt to be more transparent, Powell noted that the practice of the Fed only hiking rates quarterly, at meetings where the chair holds a news conference afterward, will no longer be the case, and that he will be meeting with the press after all eight FOMC meetings in 2019. Interest rate policy now is “more art than science and the goal should be to sustain the expansion,” Clarida stated. Echoing Clarida, Powell suggests that “Our goals will be to extend the recovery … and to keep unemployment low and inflation low. So that’s how we’re going to think about it.”
The recent Fed-speak has translated into exuberance in the financial markets. The benchmark 10 year Treasury yield fell below the key 3 percent level Thursday for the first time since September and the S&P 500 Index gained during the week as concern lessened that the Fed would extinguish a nearly decade-long expansion. Globally, the case has been different. The synchronized growth that had been the big story of 2017 has faded, putting the U.S. ahead of many of its global peers.
One wonders when the elephant in the room is going to speak. Powell makes mention of our growing deficits, but speaks in generalities. Powell repeated concerns brought up in the past about the unsustainability of the current fiscal path in the U.S. Debt and deficits continue to pile up, with the national IOU over $21 trillion and the budget shortfall approaching $1 trillion a year. Add to the ticking time bomb the dwindling social security trust fund and the increased entitlement spending, a day of reckoning will come as neither politics nor economics has the stomach to take this on.