What is Fed chair Jerome Powell really worried about?
Federal Reserve Chairman Jerome Powell is scared. But about what?
The Fed wore its emotions on its sleeve Wednesday when it indicated that it won’t push borrowing costs up any more this year, keeping the fed funds rate between 2.25 percent and 2.5 percent.
Powell also stated that there could possibly be only one more increase before the 2020 presidential election, although even that hike is one of those we’ll-see-about-it kind of things.
Just a couple of months ago, the Fed was clear that rates would go up two times, if not three, in 2019. There were four rate increases in 2018 alone.
The Fed also showed nervousness when it announced, at the conclusion of its two-day policy-making committee meeting, that it would very shortly curtail the shrinking of its balance sheet.
The Fed loaded its books with trillions of dollars of government bonds under its quantitative easing programs to offset the effects of the Great Recession. Over the past couple years, it has been trying to unload those extra bonds, but its balance sheet has only declined by about $600 billion, for a total of around $4 trillion.
It’s pretty clear that Powell and the rest of the Fed members are panicking. But we don’t know the reason for this fear, which seems to have begun sometime in December.
Was it the attacks on the Fed by President Trump around that time? That could very well be the answer, although the Fed — which clings to the independence from politicians it pretends to have — would never, ever admit this.
Or, is Powell afraid of what the economy is doing? That’s a good guess except that Powell insisted, in his news conference after the Fed’s vote on rates, that “economic fundamentals [in the US] are very strong.”
If the economy is “very strong,” why did the Fed decide not to combat possible inflation by raising borrowing costs again?
Despite what Powell said during his press conference Wednesday, the communiqué the Fed wrote after the rate decision did admit that economic growth was slowing. And the Atlanta Federal Reserve’s GDPNow forecast shows that the economy has been improving at an annual rate of only 0.4 percent in the first quarter of 2019, which ends in a couple of weeks.
And that’s pretty scary.
But here’s what I think. At the end of last year, Powell was afraid that the stock market was creating “asset inflation” that was going to cause prices of everyday things to rise unreasonably fast.
Powell has his own euphemism for this — “financial imbalances” — and it had him concerned that rate hikes were going to come fast and furiously.
Then stocks tanked. And Trump bellowed. So Powell caved.
Now we will see if the US is destined for a period of dangerously high inflation that’ll make Powell look foolish and incompetent and prompt him to reverse course again.