Another Fed Freak-Out

Or, should I say, mini freak-out? After all the Dow Jones Industrials and S&P 500 indices were only down 299 and 35 points respectively (a mere 1.16% and 1.27%). This certainly was not a rout and it was very predictable. This is what you would expect from the market when a newly-minted Fed Chair, Jerome Powell, made his maiden voyage to Capitol Hill to testify before the House Financial Services Committee. The message was the same as his predecessor’s: the economy is fine, moving along at an improved pace. The new stimulation from the tax cut plus a strong domestic economy could lead to a resurgence of inflation above the Fed’s stated 2% target. As such we are vigilant and because of the strength in the domestic (and worldwide) economy, we will continue to move rates up in a gradual manner (maybe 3 or 4 quarter point bumps in the funds this year). If the Fed did raise rates 4 times in the next 12 months the Fed Funds rate would be standing at 2.5% on February 27, 2019 — still more than 2 percentage points lower than the 4.85% long-term average. Ergo, we still have a long way to go before we see a more normal level vs. the historic, and there is no guarantee that we have to go that far to gain normalcy. Bottom line, readers of have gone through this exercise many times in the past 5 years. Generally, the freak-outs have been a precursor to higher stock prices as higher rates have signaled a stronger economy and better earnings for US corporations.

Market Volatility and Fed Policy

Jerome Powell

This headline out of CNBC may have added to the market’s edginess today: “Fed chairman Powell: market volatility won’t stop more rate hikes.”

This, according to a friend, was a statement that the “Fed Put” (a terminology used in the early stages of the last recovery to signify a perceived willingness on the part of the Fed to stop at nothing to support stock prices) was gone. Real or imagined, in today’s strong economy and market there is no need for a “Put.”  It is simply good policy to bring the rate structure in this country back to a more normal position because it gives the Fed dry powder for future economic pitfalls, and because it finally starts to put some money into the pockets of those who have saved but are fearful of stocks.

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Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

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