Federal Chair Jerome Powell does not have “skin in the game.” On February 5th of this year, Jerome Powell became the 16th Chairman of the Federal Reserve; the stock market immediately sold off by over four percent. Was that an early indication of what Powell’s leadership in government had in store? Up to his coronation, the stock market had been in positive territory all year; that changed on February 5th. Now, ten months later the Nasdaq, DJIA, and S&P 500 are each negative six percent for the year.
During the financial crisis of 2008, the FOMC lowered rates to zero bound, less than .25 percent; rates remained at this level the next seven years. On December 17, 2015, the Fed increased rates to .50 percent, a sign the economy was resuscitating from the previous meltdown when housing and stock prices tanked, GDP growth contracted, and 8.7 million jobs were lost. A year later the fed raised rates for the second time in eight years. The Fed hiked the rates incrementally by ¼ point three times in 2017 and four times this year; the fed funds rate now stands at 2.5%.
2018 has been a year of ample worries: trade tariffs, China slowdown, political bi-partisanship, deficits, a strengthening U.S. economy with consistently high consumer sentiment, low unemployment, and above-trend GDP growth rates. Why did I include the good things that are happening along with the worries? Because it is these positive attributes that are apparently influencing Powell and company to continue their rate raising at a pace that is more akin to a race than is in anyway necessary. Think about it; for seven years rates were set at zero to revive the private sector.It worked. Now, I wonder if the Fed’s obsession with potential future inflation is about to upend what took nearly a decade to fix. From the looks of it in the chart below, this year’s fourth additional ¼ point increase to 2.5% was the straw that broke the camel’s back.
Image Source: 1db.com
