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The Powell Fed has set one goal and one goal only for its policy…
Hitting the “neutral rate of interest.”
The neutral rate of interest is when the Fed has rates equal to the pace
of inflation. While this is technicallywhat the Fed is SUPPOSEDto
be doing, NO Fed (or any other Central Bank for that matter) has
done it in over 30 years: the Greenspan, Bernanke, and Yellen Feds
were all notorious for running “accommodative” policy in which rates were
kept well BELOW the rate of inflation.
Indeed, if you had to summate Fed policy from 1987 to 2018, the best word
would be “accommodative.” It is not coincidental that this time period
coincided with serial bubbles in the financial markets. This was done intentionally by
Alan Greenspan, Ben Bernanke, and Janet Yellen.
Not Jerome Powell. During his July Q&A session with
Congress in July, Fed Chair Powell emphasized that the most important focus
for the Fed under his leaderhsip would be “a neutral rate of interest.”
In answering a question [concerning the yield curve flattening] from
Senator Pat Toomey of Pennsylvania, Powell said that, in his view,
“What really matters is what the neutral rate of interest is.” And
perhaps longer-term Treasury yields send a message about that rate.
Source: Bloomberg
I initially thought this was Powell playing to Congress (for 30+ years Fed
Chairs have simply told Congress what it wanted to hear during their
testimony). However, since that time, the Powell Fed has made it
100% clear that it did in fact WANT neutral rates.
Last month, Dallas Fed President Robert Kaplan outlined this in no
uncertain terms.
The neutral rate of interest is the federal funds rate at which
monetary policy is neither accommodative nor restrictive. It is a theoretical
concept, meaning that it can’t be directly observed—it must be inferred
from market and other economic data. Economists’ views on this
rate are necessarily estimates and inherently uncertain. However, while
theoretical, estimates of the neutral rate are critical to assessing and
making decisions regarding the stance of monetary policy.
My own view, informed by the work of my colleagues Evan Koenig at the
Dallas Fed as well as John Williams of the New York Fed and Thomas Laubach at
the Federal Reserve Board, is that the longer-run neutral real rate of
interest is in a broad range around 0.50 to 0.75 percent, or a nominal
rate of roughly 2.50 to 2.75 percent.
With the current fed funds rate at 1.75 to 2 percent, it would
take approximately three or four more federal funds rate increases of a
quarter of a percent to get into the range of this estimated neutral
level.
At this stage, I believe the Federal Reserve should be gradually
raising the fed funds rate until we reach this neutral level.
At that point, I would be inclined to step back and assess the outlook for
the economy and look at a range of other factors—including the levels and
shape of the Treasury yield curve—before deciding what further actions, if
any, might be appropriate.
Source: Dallas Fed
The key items in the above quote are the fact that a Fed President is
OPENLY calling for neutral rates (all but unheard of). Moreover, Kaplan is
basing his view on the work of NY Fed President John Williams. Williams
is Vice-Chair for the Fed (Powell’s right hand man). He, like Powell, is also
a voting member of the Fed Board.
Put a different way… the above quote is effectively Fed leadership
broadcasting to the world that its current line of thinking is
that the Fed will be hiking rates until it reaches a neutral rate.
Doing this is going to create a SERIOUS issue for the financial markets. As
we noted earlier this week, already globally numerous markets ranging
from China to Germany have entered corrections, if not outright bear markets
as a result of the Fed’s hawkishness.
Eventually this mess is going to spill into the US markets. When it does,
the bursting of the Everything Bubble will have officially hit US shores.
On that note, we are putting together an Executive Summary outlining all
of these issues as well as what's coming down the pike when the Everything
Bubble bursts.
It will be available exclusively to our clients. If you’d like to have a
copy delivered to your inbox when it’s completed, you can join the wait-list
here.
Do NOT delay... there are fewer than 17 slots remaining.
https://phoenixcapitalmarketing.com/TEB.html
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