No central banker really wants to get all the publicity that central bankers are receiving these days.
You look at some of the major newspapers, like the New York Times, the Wall Street Journal and the Financial Times, and their Monday editions are filled with articles about Jerome Powell, Chairman of the Board of Governors of the Federal Reserve System, and others, and you read about the changing economic conditions, the changes in direction of monetary policy and the impact President Trump is having on any change in direction that might take place.
Central bankers don’t like attention, particularly when it is connected with political advice.
But, that is not the way things are today
In fact, that is not the way things have been for quite some time.
The United States, and other countries around the world, has evolved into a system where the monetary authorities stand out amongst all the other policymakers within a government.
And, it is hard to dodge such attention when your chief, in this case Jerome Powell, is designated the second most powerful person in Washington, DC.
It is hard not to give so much focus to the Federal Reserve when, over the past ten years or so, the Fed has been the primary driver of the current economic expansion.
This interpretation has been driven by the Federal Reserve, itself.
Former Fed Chair Ben Bernanke, building upon his academic research done while a professor at Princeton University, was the source of Federal Reserve policy coming out of the Great Recession.
The foundation of the Fed’s policy was to stimulate stock market growth, which would create a wealth effect that would drive consumption expenditures and drive the economy to recovery.
The policy worked. The stock market hit one historic high after another, consumer spending drove the economic recovery, and now, at the end of June, the expansion will end its tenth year.
During this time period, the only wavering tended to be when market participants believed that the Fed might “back off” from this policy. So, we had the “tantrum” when the Fed ceased its third round of quantitative easing, and other minor “rifts” at other times when the Fed’s direction was not clear.
Over the past year, we have even seen another “adjustment” when investors felt that the Fed might be changing its stance, but Mr. Powell and other Fed officials came to the rescue and, as I wrote last week, "the dance continues.”
One of the major changes this approach to monetary policy created was the investor movement, during the recovery, from mover value based investment managers to those that were more passively orientated.
With the Federal Reserve underwriting the relatively steady rise in the stock market where new historic highs became commonplace, passive funds outperformed all others and the continuous rise in the market reduced the risk component of passive fund investment. Massive amounts of money flowed into the passive funds.
The major thing that politicians have to criticize the current recovery about is its modest rate of growth. Over the ten years of expansion, the compound annual rate of growth will come in around 2.2 percent. Not very exuberant, by any measure.
Over the past three years, however, the Fed has overseen a continuous increase in its policy rate of interest. Right now, the range of the policy rate is 2.25 percent to 2.5 percent. In terms of the policy rates in other major central banks around the world, this is the highest. Consequently, given the slow economic growth and a very passive rise in the inflation rate, around 1.5 percent, there has been growing vocal pressure from the political side of the aisle, especially from President Trump.
In combating this, Mr. Powell and other Federal Reserve officials have taken the stance that the Federal Reserve, in making policy decisions, is data driven. And, they have stuck by this argument for most of the last two years.
Over the past six months or so, the economic data have indicated that US economic growth might be slowing down. Furthermore, inflation continues to remain below target. And, the looming threat of several trade wars has injected a lot of uncertainty into forecasts of where the US economy, as well as other economies, are going.
Consequently, as we have seen, Mr. Powell and other Fed officials have begun to talk about the possibility that the Fed will stop raising its policy rate of interest and even consider lowering them. But, these officials have not yet said that they would lower them, that is just a possibility for now.
Financial market participants have not taken this caution in that way. In fact, Monday's headlines ask the question about when the policy rate will be lowered, not if.
In addition, many people have responded to Mr. Powell’s remarks by claiming that all Mr. Powell is doing is giving in to the pressure coming from the White House to lower rates. Quite a few comments to my posts have argued the same thing.
Right now, I don’t believe that Mr. Powell and the Fed are giving into Mr. Trump. Up to this point, I think Mr. Powell has done a good job dealing with the pressures he is facing and keeping the Fed on its own course.
The major factor that is looming over the Fed’s actions and the consequent behavior of the bond market and the stock market is the uncertainty that has spread throughout the world. For one, this has resulted in massive flows of 'risk averse' funds throughout the world. This is a reason why US bond rates are as low as they are and why the yield on the 10-year yield on the German bund has hit an historic low of a negative 28 basis points. Central banks cannot ignore this.
Unfortunately, in my mind, the Fed-talk of last week resulted in the value of the US dollar declining in foreign exchange markets. As I have been arguing, dollar strength has been a good sign about the US economy and markets seemed to indicate that this strength would continue.
All the talk about cutting the Fed’s policy rate of interest has resulted in some short-term weakness in the dollar. It is my hope that this weakness will not continue. The value of the dollar is something we need to keep a close eye on in coming days. I will try to contribute to this.
So, Mr. Powell and Federal Reserve officials are under tremendous pressure these days. Obviously, what they do will have very important ramifications for bond prices, stock prices, the value of the dollar, and more. Unfortunately, the pressure on them is not going to lessen going forward. Let’s hope they make the correct decisions. Let’s hope that politics doesn’t drive them.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.