The Federal Reserve chairman has said repeatedly that his interest rate policy for 2019 will depend on how the economy is doing. “Data dependent” is exactly how he explained the Fed’s policy any number of times.
And if that’s really the case, Wall Street right now should be worried — very worried — that there will be at least two more interest rate hikes this year. All anyone has to do to understand why is to look at the minutes of the Fed’s policy-making committee’s meeting of Dec. 18 and 19.
The minutes were released Wednesday afternoon.
The meeting’s notes say that “the information reviewed for the Dec. 18-19 meeting indicated that labor market conditions continued to strengthen in recent months and that real GDP [gross domestic product] growth was strong.”
Also, “the [Fed] staff continued to expect that real GDP growth would be strong in the fourth quarter of 2018, although somewhat slower than the rapid pace of growth in the previous two quarters.”
Strong, strong, strong. (I’m not agreeing with that assessment, just telling you how the minutes read.)
In fact, if you go through the minutes of that last meeting, you can hardly find anything that the Fed finds wrong with the economy. Sure, the group thinks the economy will expand by only an annual rate of 2.3 percent in 2019 and not the 3 percent it looks as though it did in 2018.
But that extra growth last year came because of the tax cuts. You can’t blame the economy for slowing down without DC’s goodies.
The statements I just quoted alone should have people talking about how many rate hikes there will be in 2019 and not misleading us into believing there won’t be any.
So why the lie?
Because Powell and his Fed aren’t really economic-data dependent. They are market-data dependent — the Fed is afraid that it’s causing the stock market to go down.
And the Fed is afraid, I supposed, that people — including the president of the US — are getting angry at it. I also imagine it can’t be any fun for the members of the Fed and their staff to go to holiday parties and hear people moan about their stock market losses.
And, I also suppose, it’s good for the careers of Fed members who don’t want to be underpaid public servants forever if they give the financial community what it wants.
But understand something: It isn’t the Fed’s job to protect a stock market bubble. Its job is to keep inflation down and protect the integrity of the US dollar. And inflation is definitely a risk when there are bubbles in financial markets.
It is very clear from the latest minutes that Powell has his eye on the stock market. The Fed said it “reviewed developments in financial markets over the intermeeting period,” meaning from the previous meeting held in November.
“Asset prices were volatile in recent weeks, reportedly reflecting a pullback from risk-taking by investors,” according to the minutes. The Fed blamed the “state of trade negotiations between China and the US,” as well as investors worrying about global growth, “the unsettled state of the Brexit negotiations” and the uncertainty about European politics.
Remember, these are the minutes from meetings that took place on Dec. 18 and 19. By Christmas Eve, Wall Street had gotten clobbered even more and investors were pulling out of stocks with a vengeance.
It was a rough ride until Friday, Jan. 4, when Powell seemed to suddenly become more dovish —meaning he eased up on the possibility of more rate hikes.
Powell admitted then that he was “listening very carefully to the market.”
But which market? Is he listening to the bond market, which has been driving rates higher? Or is he listening to the stock market, which has been begging Powell not to raise rates anymore?
Ultimately, bonds win even if Powell hasn’t discovered this yet. If the economy remains as good as the Fed believes it is and inflation picks up, the bond market will increase interest rates on its own.
And the Fed will be forced to continue to push rates higher.
That brings me to an interesting coincidence on Jan. 4. That’s when Powell was in Atlanta making nice with the markets.
That’s also the morning that the US Labor Department announced that 312,000 new jobs had been created in December and that wages had grown more than the experts expected. If you included the upward revisions to previous months, there were actually 370,000 new jobs.
Those are very large numbers — the kind of data that the Fed says it is watching and which would determine future rate hikes. Those numbers should have caused the already battered stock market to get the crap beaten out of it.
But thanks to Powell’s squishy speech in Atlanta, stocks actually rose sharply.
Other members of the Fed are having an open discussion right now about future rate hikes. I’ll join in.
If the economic data — especially jobs — stay strong and the trade talks are wrapped up successfully, rates will be going up next year even if the Fed and Wall Street would prefer they not.
Soure: NY Post