To raise, or not to raise rates? Critics assail Fed Chair

Mr. Powell

In what seems to be pressure from the White House the FOMC of the Federal Reserve on Wednesday announced that the last rate hike would be a quarter of a point, and then announced, based in part, from other members that the Feds would look at a neutral rate, causing many observers to wonder what that meant, and why, now.

For some that pressure, in the form of either public shaming by the president, or private meetings with administration officials, makes some economists nervous that the Federal Reserve in its mission to keep inflation at 2 percent, and the nation at full employment, a basic in every undergraduate macroeconomics course, and some high school curricula, might be at risk.

President Trump seems not to have absorbed this, at best, and his remarks about the Fed and its chair, Jerome Powell not only break precedent, but also good manners.

To wit: “Mr. Trump's main beef with the central bank is that its ongoing policy of hiking interest rates is curbing growth just as Americans are reaping the benefits a buoyant economy. The job market is humming, with unemployment at its lowest rate in nearly half a century. Wages, which barely rose during the post-recession "recovery," are finally giving workers a meaningful pay bump. Inflation remains tame. So why mess with success?”, reported cbsnews.com.

"Inflation has continued to surprise to the downside, not by a lot, though, claimed  Powell.

When a central bank succumbs to political pressure, the journey ahead is fraught with pitfalls, and maybe even some pratfalls.

Then there are others that are saying that they would not because of market volatility - the specter of the Dow Jones plummeting, and that higher rates are crimping growth, for example in the housing market, and that the nation is climbing out of the Great Recession.

So for good measure, let’s hear from CNBC’s resident economic curmudgeon, Jim Cramer who said without a hint of regret:  "If I were running Trump's re-election campaign, Jay Powell would be my worst nightmare," said Cramer, who, like the president, has been calling on Powell to stop. Powell apologists, "they must have no sense or empathy for what's about to happen to the working person in this country."

“But the messaging in the Fed’s dot plot of interest-rate projections, policy statement and Fed Chairman Jerome Powell’s press conference are all more important than the move, and most economists think they will uniformly lean dovish, analysts said. At some point, perhaps as soon as March, the Fed will skip a quarterly rate hike. At the moment, most economists think that will be a pause and not the end of the tightening cycle,” reported Market Watch in a predictive spirit the day before the expected increase.

Dovish, if we remember, was the byword of Powell's predecessor, Janet Yellen, and she, too, was assaulted for that position, yet it also seems that the martyr’s crown is not for him, as he struggled for a self-described pause.

Ms. Yellen

Some have said that 2019 is the year for cutting, but let’s hold that thought for a moment.

Continuing in that vein, we see, “Michelle Meyer, head of U.S. economics at Bank of America Merrill Lynch, [who] said Powell must sound reassuring without sounding hawkish.

“The key words will be caution, patience, risks and data dependence,” Meyer said.

The reduction in the dots will be seen as a “market-friendly capitulation” and the market is already anticipating the move with current market pricing suggesting less than one hike in 2019, Meyer said.

“Powell blinked,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.

Are we to assume that this is truly the position of the market?

At the risk of sounding “wonky”, a positive in my book, at least, “It is positive because it sends a tone that they are not overtightening and the yield curve is not going to invert,” Ricchiuto added.

A brief refresh for those that avoided macroeconomics like the plague, in favor or a beer at the campus pub: “When short-term yields on government debt pop above their longer-dated peers, it is often a prelude to a recession. The flattening yield curve is a key market concern,” he explained.

Yet, the market did erupt preceding the announcement of another rate hike, and “Erasing a 380-point gain prior to the Fed decision, the Dow Jones Industrial Average sank 351 points, closing at a 13-month low. The S&P 500 finished at a 15-month low, with 60 percent of the index now in a bear market, marked by declines of 20 percent or more from recent highs. The Dow opened nearly 100 points lower on Thursday.”

These could have been that unseen hand that we all learned about, decades ago, guiding the economy, but humor aside, selling is always an option for the market.

As promised earlier, another route, hovering in the background is the opposite -- the R word writ large - recession, and that some are saying is close on our heels, even with a rise in employment, and a strong dollar --- and that in 2020 we will see rates cut. So, take that!

Hold on say others, Powell "is raising the possibility of moving the landing zone by saying that we're not too far from the neutral rate and don't need to raise rates as much as previously thought," said Gregory Daco of Oxford Economics,” and also added, in his interview with CBS, that “he thinks Mr. Trump's claims that the Fed is denting the economy don't hold up to scrutiny, noting the strong pace of growth in recent months even as policymakers were in hiking mode. The far bigger impediment to growth next year will be the fading of any stimulus from the massive tax cuts Mr. Trump enacted in late 2017, he predicted.”

Ouch!

"Fed tightening won't be the main source of the slowdown in 2019," said Daco, "it'll be coming from Trump's policies."

Please, sir, may I have another?

Circling back we can also see a myriad of statements that makes many nervous that Powell is trying to serve two masters.

"Where we are right now is the lower end of neutral," he said during a news conference at the conclusion of the two-day Federal Open Market Committee meeting. "There are implications for that."

Thanks to the good office of CNBC we also see that “Statements Powell made over the past several months about the neutral rate have caused sharp market fluctuations.

In early October, the chairman said the Fed was "a long way" from neutral. The statement coincided with the beginning of a rough wave of volatility that has sent major stock market averages into correction territory.

Then in November, he addressed the issue again, saying the current funds rate was "just below" the range of projections that individual FOMC members had for the neutral level.”

Whose world is this anyway, asked pundits, with only the slightest tongue in cheek; we also heard the chairman say this, in reaction to reporter’s questions on what he was really trying to say:  "Monetary policymaking is a forward-looking exercise, and I'm just going to stick with that," he said.

"There's real uncertainty about the pace and the destination of further rate increases, and we're going to be letting incoming data inform our thinking about the appropriate path," Powell later added.

With the hike, announced Wednesday, the funds rate is now targeted between 2.25 percent and 2.5 percent. The range of neutral estimates from committee members is around 2.5 percent and 3.5 percent.

“The Federal Reserve is "listening" to a plunging stock market but still views the economy as strong enough to stick to an increasingly data-dependent, yet higher, course for interest rates, New York Fed President John Williams said on CNBC Friday. The Fed raised rates by a quarter point this week, the fourth hike of the year, sending stocks SPX, -2.06% sharply lower,” reported MarketWatch.

Then again, all things considered, Powell might be in self-protective mode, knowing that if the economy does run off the rails, next year, he will be Trump’s scapegoat.