fed eccles building

Beware a Fickle Fed

January 18th, 2017 by

Inflation is picking up. The U.S. economy is gradually improving. The stock markets are at all-time highs. Official unemployment numbers are as low as they have been in decades.

Fed Chair Janet Yellen testifying before Congress (photo: Federal Reserve)

Fed Chair Janet Yellen testifying before Congress (photo: Federal Reserve)

In sum, the case for the Federal Reserve to accelerate the glacial pace of its path toward interest-rate normalization is growing stronger. Yet that is hardly any guarantee that the central bank will actually follow through with raising the federal funds rate multiple times this year.

In fact, if recent history is any guide, we can expect the same rhetorical feints from the Fed as it finds justifications to keep interest rates abnormally low.

The Fed Fake-Out

The first and most obvious problem in believing in the likelihood of multiple rate hikes this year from the Fed is that we’ve seen this movie before. In fact, we had to endure the same exact picture—not even a sequel!—in 2015 and 2016: a single quarter-point rate increase in December that followed a year of hemming and hawing.

The most recent meeting minutes of the Federal Reserve Open Market Committee (FOMC) gathering reveals that the central bank expects to increase the fed funds rate on three separate occasions in 2017.

We won’t be holding our breath. Bear in mind that at the same time one year previous, the Fed had forecast four rate hikes for 2016, and ended with just one. The story was similar in 2015, when the Fed signaled all year it would be embarking on rate normalization but used only its last opportunity to do so amid an ongoing global economic slowdown.

Granted, 2016 was filled with surprises that one could argue gave the Fed pause: the successful Brexit vote, the election of Donald Trump, and other such anti-free-trade headwinds to the “business-as-usual” that financial markets love. While even the best projections from economists can’t account for these kinds of developments, it’s telling that the Fed has been so hesitant to act.

fed eccles building

Federal Reserve headquarters, Eccles Building, Washington D.C. (photo: Federal Reserve)

An editorial on Bloomberg View quaintly captures this idea:

“A slowing of the global economy and global trade because of China’s and Europe’s weaknesses may earn the Fed chair the moniker of ‘Once-a-Year Yellen’ for the third consecutive year.”

Moreover, keeping interest rates low makes it easier to service (repay with interest) debt—and we all know that America has piled up quite a pile of that.

Return of the Vampire Squid

Although it is the unelected “fourth branch of government,” the Federal Reserve has long been accused of serving the interests of the large private banks that dominate the “Federal Reserve system” of banks. Perhaps the two most commonly ostracized culprits are JPMorgan Chase and Goldman Sachs (though these two institutions are hardly the only ones). The latter has earned a reputation for Machiavellian practices, flouting rules and regulations so long as it improves the bottom line. Goldman Sachs has paid nearly $10 billion in fines to authorities and regulators for its misdeeds before and during the financial crisis.

Just a year or so after the lowest point of the crisis, journalist Matt Taibbi famously dubbed the bank the “great vampire squid” in a scathing Rolling Stone article about Goldman’s long history of market manipulation.

A number of Fedwatchers (and the Fed itself) have cited the uncertainty surrounding the incoming Trump administration as something to worry about. How will the Fed deal with the unpredictability of Trump? Well, it may not be as contentious as you would first expect.

goldman sachs

Given the consistent influx of former GS employees that end up in high-ranking positions in government, the bank has also proven itself worthy of the moniker “Government Sachs.” The duplicity of Obama in campaigning against Wall St while filling the the post-financial-crisis cabinet with a slew of former Goldman employees. Despite the stark differences between Obama and Trump, this same situation is playing out again.

The Trump White House will include several prominent alumni of Goldman Sachs, including Treasury Secretary Steve Mnuchin, National Economic Council Chair Gary Cohn (the former president of GS), chief White House strategist Steve Bannon, Securities and Exchange Commission (SEC) Chair Jay Clayton, and advisor Dina Powell.

These are the people who will craft the country’s economic policy, and their Goldman connections make them perhaps too cozy with the Fed, which is supposed to be apolitical or “politically independent.” Considering the connections between the new presidential administration, the Fed, and the private banking sector, it will probably once again be a fool’s errand to try and hold the central bank accountable to its own policy forecasts.

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.