Federal Reserve Board, No Rationale for Current Policy?
Federal Reserve Chairman, Jerome Powell did a 180 degree turn when he
“We are a ‘long way’ from neutral on interest rates” October 3, 2018 –
· Translation: we are going to aggressively raise rates until we reach
“neutral" interest rates
“We will be patient as we watch to see how the economy evolves." January 4, 2019 –
· Translation: we will NOT be so aggressive at raising interest rates
You do NOT think the Federal Reserve is Powerful?
Here is a chart of S&P 500 index since the October 3, 2018 “we are a long way” speech, through today.
The S&P 500 index had dropped -19.61% to the low in December 2018, since that speech.
On January 4, 2019, the date of the Powell “we will be patient” speech – the Dow Industrials soared up +746.94 points (see green arrow below).
The Federal Reserve Board has adopted two policies that I believe are not
1. A 2% inflation target. The Fed has never had an inflation target in the past.
· "I puzzle at the rationale. A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.” Volcker, Paul, Keeping at It: The Quest for Sound Money and Good Government. 2018, Public Affairs
2. Neutral Interest Rates. The Fed has never had a “neutral" interest rate policy in the past.
· In October 2018 the Fed was letting us know that "Neutral" interest was approx. 3.4% on federal funds rate. How do they know that? It begs the question, if you know what the neutral rate is why not change immediately to that rate. Would it not be better to raise rates slowly, since it takes 6+ months to feel the effect of interest rate increases and then see how those rate changes have impacted the economy? That’s a patient policy, which Mr. Powell has now adopted.
Not much that we can do about the Federal Reserve.
No doubt Fed actions make it more difficult to manage money, since an unpredictable Fed makes investing even more of a challenge.
No doubt the Fed has a huge impact on the stock market and the world economy.
We will continue to do our best to manage money with the dual purpose of making our clients’ money as well as doing our best to preserve client capital.
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