Or, should I say, mini freak-out? After all the Dow Jones Industrials and S&P 500 indices were only down 299 and 35 points respectively (a mere 1.16% and 1.27%). This certainly was not a rout and it was very predictable. This is what you would expect from the market when a newly-minted Fed Chair, Jerome Powell, made his maiden voyage to Capital Hill to testify before the House Financial Services Committee. The message was the same as his predecessor’s: the economy is fine, moving along at an improved pace. The new stimulation from the tax cut plus a strong domestic economy could lead to a resurgence of inflation above the Fed’s stated 2% target. As such we are vigilant and because of the strength in the domestic (and worldwide) economy we will continue to move rates up in a gradual manner (maybe 3 or 4 quarter point bumps in the funds this year). If the Fed did raise rates 4 times in the next 12 months the Fed Funds rate would be standing at 2.5% on February 27, 2019 — still more than 2 percentage points lower than the 4.85% long-term average. Ergo, we still have a long way to go before we see a more normal level vs. the historic, and there is no guarantee that that we have to go that far to gain normalcy. Bottom line, readers of kortsessions.com have gone through this exercise many times in the past 5 years. Generally the freak-outs have been a precursor to higher stock prices as higher rates have signaled a stronger economy and better earnings for US corporations.
Market Volatility and Fed Policy
This headline out of CNBC may have added to the market’s edginess today: “Fed chairman Powell: market volatility won’t stop more rate hikes.”
This, according to a friend, was a statement that the “Fed Put” (a terminology used in the early stages of the last recovery to signify a perceived willingness on the part of the Fed to stop at nothing to support stock prices) was gone. Real or imagined, in today’s strong economy and market there is no need for a “Put.” It is simply good policy to bring the rate structure in this country back to a more normal position because it gives the Fed dry powder for future economic pitfalls, and because it finally starts to put some money into the pockets of those who have saved but are fearful of stocks.
“Don’t Blow It”
This sage bit of advice came to Chairman Powell from House Financial Services Committee Chair, Jeb Hensarling (R-Texas). Hensarling was being interview Tuesday morning by CNBC’s Joe Kernan as a precursor to yesterday’s Humphrey-Hawkins testimony by Chairman Powell.
After his admonition about blowing “It” Hensarling went into a discussion based on a question from Kernan about setting inflation targets, setting a range for inflation instead of a single point (2% being the current target) and finally the need for targets at all. Mind you, Humphrey-Hawkins was about setting goals for growth/ full employment balanced by reasonable inflation. This has become the Fed’s dual mandate. Hensarling suggests there may be a need for change in this mandate. During the interview Hensarling (who is somewhat qualified by virtue of an economics degree from Texas A & M) questions the wisdom of setting single-point inflation targets as well as target ranges for inflation. He also suggests that this might be better left in the hands of Congress (OMG!). This concept really freaks me out. First of all they would never be able to agree on a target even if both houses were controlled by the same party. Second, there is an old joke about how camels came into being. A camel is a horse that was designed by a committee. Replace committee with Congress.
What’s your take?
P.S. Wednesday, 2/28/2018, was another bad day for stocks. The yield on the 10-year was down 4 basis points … ergo, not about interest rates. The pundits blamed it on falling oil prices. Who knows? We are in a correction in a great bull market. It’s normal! Enjoy!
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