This Week's Message: The Fed's Clearly Behind the Curve

If I had a nickel for every time I've read, or heard, an "expert" proclaim that the Fed is forever the culprit who brings on U.S. recessions, well, I'd have me some serious nickels.

Essentially, legend has it that it's the Fed's tightening of monetary policy -- i.e, raising interest rates and pulling liquidity out of the system by various means -- that ultimately kills expansions.

I tell ya, those poor blameworthy brainiacs at the Fed indeed deal with the sharpest of double-edged swords. On one edge they're forever accused of being too accommodative (keeping rates too low and the system too flush for too long) and, thus, blowing up all manner of bubbles (tech late-90s, mortgages mid-00s, not to mention the killer 70s inflation after Fed chair A. Burns succumbed to Nixon's threats and loosened when he knew he should've been tightening) -- myself having been a bubble-era accuser. On the other, as mentioned in paragraph 1, they're chided for being too aggressive (presumably over-tightening to head off nonthreatening inflation) and ultimately killing the goose just as it's in the middle of laying oodles of golden eggs. 

As you might imagine, 2018 has seen a plethora of accusations of the latter. Google "the fed causes recessions" and you'll see what I mean.

Me? I generally (save for my own bubble-blowing finger-pointing history) reject such accusations -- particularly of the latter. You see, I like data, I like information, yet, I do like experience -- my own in particular (I like to think of myself as a rational empiricist). 

Not to suggest that I've no interest in the experience of others, quite the contrary in fact. It's just that I am very selective in from whose I glean. Suffice to say that the folks whose market and economic experiences I value are the ones I deem to be the most thoughtful, intelligent, experienced, humble, honest and apolitical players of the past few centuries. They're a rare breed, and their humility makes them of little use to today's desperate-for-your-attention, and politically-motivated, media.

My point? Waste your time if you must on the YouTube, CNBC, Fox Business News, Forbes, etc., fed-bashing guru du jour, but, alas, wasting your time you'll be

Back to the Fed:

Take a look at my busy chart below. The red shaded areas represent the past 7 U.S. recessions. The white line represents the fed funds rate, the red line is inflation (the Consumer Price Index). The circled percentages along the bottom represent the hit the economy took (the peak to trough decline in GDP) during each recession. I circled the painful ones in red, the relatively mild ones in green.

Notice the arrows extending from the painful recessions, and the lack thereof from the mild ones. Note that they're pointing to periods preceding each when the fed funds rate fell below the CPI. In essence, the worst recessions appear to follow periods when the Fed fell behind the inflation curve. 

Now note the positioning of each (yellow arrows) for pretty much all of the past 9+ years. Uh-oh!!  

click to enlarge...


While there's no bashing here (more like cheering on), now you know why we think the Fed needs to get busier and hike while the hiking's good -- to essentially catch up to (if not get ahead of) the inflation curve. And -- aside from it being horrendously bad economics anyway -- we think the Administration needs to put an end to its foreign trade disputes ASAP: It's a huge risk to the economy at the most inopportune time (as it could stay the Fed's hand and keep it from amassing sufficient ammo to do battle with the next recession)!