The Fabulous Federal Reserve*

America’s economy has been on a roll since the Great Recession of 2009. GDP has been on a steady rise with average annual increases in excess of 2{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}. It has yet to record even a single negative quarter. Job creation has exceeded projections with the unemployment rate recently setting new multi-decade lows. Both GDP growth and the favorable unemployment trend followed the worst economic collapse since the Great Depression. The expectation is that the current expansion will set a post-WWII record this Summer. With that, the stock market has been setting new highs and appears ready to continue to do so having multiplied over four times (that’s 4x) since its 2009 bottom. In short, the performance of America’s economy since the Great Recession of 2009 has been exemplary … and the American economy continues to motor along at an excellent, measured, sustainable pace. All in all, an extraordinary economic performance!

Who is responsible for this astonishing period of economic growth? Perhaps it was the Obama administration’s economic policies that triggered the expansion? Or maybe the past 10 years of growth can be attributed to the election of President Trump more than halfway through the expansion in 2016?

Although both the Obama administration and the Trump administration added a bit of fuel to the economic fire, neither deserves kudos for the country’s economic success. Each both added and subtracted from growth.

As you’ve undoubtedly determined from the title of today’s TLR, the entire credit belongs primarily to the Federal Reserve and its three most recent Chairmen: Ben Bernanke (appointed by President Bush); Janet Yellin (appointed by President Obama); and Jerome Powell (appointed by President Trump).

Why is this so?

As past commentaries have discussed, human history has never experienced an economic period similar to 2009-2019. In addition, never before has there been a coordinated, globalized economy. Never before have products and services been interchangeable on a global basis. Never before have nations coordinated their currencies, their production modalities and their money-printing. No one has witnessed a similar confluence of complex economic interrelationships. In short, this time has been different and the Fed has recognized and addressed the differences brilliantly … as it is continuing to do today. It reacted by sculpting unique economic policies.

Directly after the 2008 Financial Crisis, the Federal Reserve eased credit and printed gobs of US Dollars. It coordinated that money-printing (as well as additional strategies) with other Central Banks. Every time the global economy appeared to be sputtering, the Fed came to the rescue. It used a combination of Quantitative Easing (QE creates money out of thin air – QE1 began in 2008, QE2 in 2010 and QE3 in 2012), open market operations (moving money into and out of banks), adjusting the discount rate (raising or lowering short-term interest rates), and Forward Guidance (telling the world what it would do). In short, the Fed did “whatever it takes” to assure continued growth. The Fed’s assurances have taken on the names of the applicable period’s Chairman: the “Bernanke Put,” the “Yellin Put” and the “Powell Put.” In addition to successfully managing GDP growth and reducing unemployment, the Fed’s policies also lit a fire under the stock market. That fire continues to burn.

What is interesting is that the Fed hasn’t been given the credit it deserves for the outcome it’s achieved. Apparently, unless the Fed is able to perpetually fine-tune U.S. economic growth in a manner that assures everlasting growth which is impossible, it will be criticized for incompetence not doing enough a good job. For those who understand how difficult the Fed’s task has been, and how that task becomes more challenging by the day, this is what one has come to expect of economically unsophisticated politicians shocking. Of course, politicians want to avoid even proposing legislation that could cost them votes, as all legislation no matter how beneficial inevitably does. Their desire is for a Goldilocks economy where growth continues without the need for Congress or the President to expend political capital in their attempts to achieve it. When the Fed isn’t fine-tuning the economy in a manner that assures their re-election success, instead of passing legislation to further that goal by targeting economic growth, they attempt to pressure the Fed. Because the linchpin for politicians’ successful re-election invariably is a rising stock market, their complaints naturally focus on ways to raise stock prices.

President Trump understands this quite well. He has been unsuccessful in 2019 in persuading Congress to enact anything economically constructive legislation. He also has been focusing on his re-election bid as he has since he was elected. He’s made his desire clear for the Fed to run a loose economic program, to do whatever it takes to ensure that economic growth continues through at least November 2020. His two most recent nominations for Fed seats are Herman Cain and Stephen Moore, both of whom have indicated their full support for the President’s loose money policies. On Sunday, the President tweeted his displeasure with the Fed in a further effort to loosen Fed policy: “If the Fed had done its job properly, which it has not, the Stock Market would have been up 5000 to 10,000 additional points and GDP would have been over 4{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} instead of 3{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35} … with almost no inflation. Quantitative tightening [the Fed raised interest rates four times in 2018] was a killer, should have done the exact opposite!” His tweet indicated that the S&P 500 Index would be over 36,000 if the Fed hadn’t raised rates. Really?

To oversimplify what is a highly complex economic analysis, the risk for the U.S. economy is two-sided. If the economy heats up too far or too fast, the Fed will be required to raise interest rates too far or too fast which likely will lead to a recession. As then Fed Chairman William McChesney Martin said, the Federal Reserve “is in the position of the chaperone who ordered the punch bowl removed just when the party was really warming up” because “[i]f we fail to apply the brakes sufficiently, and in time, we shall go over the cliff.” Conversely, if the economy slows down too much or too fast, the Fed will be required to lower interest rates and take all other steps necessary to stimulate economy activity. For these reasons, the Fed is constantly walking a tightrope in trying to achieve a Goldilocks economy. With the Fed rate currently 2.25-2.5{29ea29b64b10057f61377b2c087cd5b7537a0cd24da4295a308b0bf589469f35}, it would have little room to lower rates should economic activity start showing signs of a slowdown, which explains its current reluctance to take action.

Chairman Powell was President Trump’s choice to head the Fed, and the consensus in the economic community is that Powell was quite a good choice. Nevertheless, when the Fed in 2018 signaled that it might be “removing the punch bowl,” Trump changed his mind, indicating that he was having second thoughts. He even discussed the feasibility of firing Powell. Trump has criticized the Fed’s rate increases despite the Fed’s expressed goal of maintaining a level that neither stymies nor stimulates growth.

Economics is best left to the experts. The Fed under each of its three most recent Chairmen has shown a rare capability to do the right things at the right times, albeit sometimes as part of a correction of a prior misstep. A President has every right to pressure the Fed for his own political purposes. However, it’s wise to recognize the difference between expertise and political expediency.

A Reader’s Comment on “The Parable of the Earbuds: The Tension Between Consumption and Investment

“I disagree with your characterization of ÔÇÿa centralized, controlled economy’ as a socialist system. It may be a component of a socialist system, but it is the main theme of a fascist system. In fact, it is questionable whether China’s current system is more socialist or fascist.”

Finally (from a good friend)

“Lexophile” describes those who have a love for words, such as “you can tune a piano, but you can’t tuna fish,” or “To write with a broken pencil is pointless.” In 2018’s annual competition held by the New York Times to see who can create the best original lexophile, the following were submitted. The winning submission is posted at the end.

No matter how much you push the envelope, it’ll still be stationery.

If you don’t pay your exorcist you can get repossessed.

I’m reading a book about anti-gravity. I just can’t put it down.

I didn’t like my beard at first. Then it grew on me.

Did you hear about the crossed-eyed teacher who lost her job because she couldn’t control her pupils?

When you get a bladder infection, urine trouble.

When chemists die, they barium.

I stayed up all night to see where the sun went, and then it dawned on me.

I changed my iPod’s name to Titanic. It’s syncing now.

England has no kidney bank, but it does have a Liverpool.

Haunted French pancakes give me the crepes.

This girl today said she recognized me from the Vegetarians Club, but I’d swear I’ve never met herbivore.

I know a guy who’s addicted to drinking brake fluid, but he says he can stop any time.

A thief who stole a calendar got twelve months.

When the smog lifts in Los Angeles U.C.L.A.

I got some batteries that were given out free of charge.

A dentist and a manicurist divorced. They fought tooth and nail.

A will is a dead giveaway.

With her marriage, she got a new name and a dress.

Police were summoned to a daycare center where a three-year-old was resisting a rest.

Did you hear about the fellow whose entire left side was cut off? He’s all right now.

A bicycle can’t stand alone; it’s just two tired.

The guy who fell onto an upholstery machine last week is now fully recovered.

He had a photographic memory but it was never fully developed.

When she saw her first strands of gray hair she thought she’d dye.

Acupuncture is a jab well done. That’s the point of it.

Those who get too big for their pants will be totally exposed in the end.


*┬® Copyright 2019 by William Natbony. All rights reserved.

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