By the Time the Fed Hits the Neutral Rate of Interest, the Markets Will Be Crashing
The Powell Fed has set one goal and one goal only for its policy…
Hitting the “neutral rate of interest.”
The neutral rate of interest is when the Fed has rates equal to the pace of inflation. While this is technicallywhat the Fed is SUPPOSEDto be doing, NO Fed (or any other Central Bank for that matter) has done it in over 30 years: the Greenspan, Bernanke, and Yellen Feds were all notorious for running “accommodative” policy in which rates were kept well BELOW the rate of inflation.
Indeed, if you had to summate Fed policy from 1987 to 2018, the best word would be “accommodative.” It is not coincidental that this time period coincided with serial bubbles in the financial markets. This was done intentionally by Alan Greenspan, Ben Bernanke, and Janet Yellen.
Not Jerome Powell. During his July Q&A session with Congress in July, Fed Chair Powell emphasized that the most important focus for the Fed under his leaderhsip would be “a neutral rate of interest.”
In answering a question [concerning the yield curve flattening] from Senator Pat Toomey of Pennsylvania, Powell said that, in his view, “What really matters is what the neutral rate of interest is.” And perhaps longer-term Treasury yields send a message about that rate.
I initially thought this was Powell playing to Congress (for 30+ years Fed Chairs have simply told Congress what it wanted to hear during their testimony). However, since that time, the Powell Fed has made it 100% clear that it did in fact WANT neutral rates.
Last month, Dallas Fed President Robert Kaplan outlined this in no uncertain terms.
The key items in the above quote are the fact that a Fed President is OPENLY calling for neutral rates (all but unheard of). Moreover, Kaplan is basing his view on the work of NY Fed President John Williams. Williams is Vice-Chair for the Fed (Powell’s right hand man). He, like Powell, is also a voting member of the Fed Board.
Put a different way… the above quote is effectively Fed leadership broadcasting to the world that its current line of thinking is that the Fed will be hiking rates until it reaches a neutral rate.
Doing this is going to create a SERIOUS issue for the financial markets. As we noted earlier this week, already globally numerous markets ranging from China to Germany have entered corrections, if not outright bear markets as a result of the Fed’s hawkishness.
Eventually this mess is going to spill into the US markets. When it does, the bursting of the Everything Bubble will have officially hit US shores.
On that note, we are putting together an Executive Summary outlining all of these issues as well as what's coming down the pike when the Everything Bubble bursts.
It will be available exclusively to our clients. If you’d like to have a copy delivered to your inbox when it’s completed, you can join the wait-list here.
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Chief Market Strategist
Phoenix Capital Research
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