The Federal Reserve is believed to be raising rates on this coming Wednesday by a quarter point putting the Fed Funds Rate at 2.5%.
Fed chair Jay Powell, while saying the Fed is data dependent for future rate changes, seems to have walked back a bit his projected three raises in 2019.
However if the Fed is data dependent as Powell has said, the Dec. 19 decision should be to stand still if you are solely working off the dual mandate of the Fed to be guarding against inflation, while creating full employment.
The Fed’s biggest concern when it came to inflation was asset bubble inflation as in the stock market rise since President Trump’s election. If you look at wages, producer prices and consumer prices there is little in the pipeline suggesting that inflation will be above the targeted 2% annual growth that the Fed targets.
While Powell was Trump’s pick to lead the Fed after Janet Yellen stepped down, I believe Treasury Secretary Mnuchin was the driving force behind the pick and Trump knew little of Powell’s thoughts on economic and monetary policies.
The President’s tweets on Fed moves and speeches tells us that Powell & Co have a differing agenda than The White House when it comes to the economy.
Powell’s four rate hikes since March have certainly taken the wind out of the sails of stocks and house prices. These are the assets of the American people and Trump sees Powell as undermining his economic growth prospects for these people.
After a decade of near-zero rates, where Americans were battered by no interest on savings and low-to-nil wage gains, the Fed needs to get its foot off of the brakes and that is what the president is saying.
Only through growth — and that’s what the tax cut was meant to spur — can the US move forward on reducing its $21 trillion debt level. If you give a tax cut and then cut the economy at its knees with tightening credit, then you set yourself up for a deflation/stagflation scenario that could arrive closer to the 2020 election cycle.
This is not lost on President Trump. And this is why we are hearing about structural change coming to the Federal Reserve in 2019.
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