• Tim Brockman

The Fed is taking an academic approach to monetary policy and that's a problem

Listening to Jay Powell's press conference today was like listening to a college economics professor drone on in a monotone, robotic voice about monetary policy from a textbook. He said all the right things. He hit all the right data points. He even said the Fed will be flexible based on incoming data. Only problem is, that's not how economics play out in real life.


Macroeconomics play out in real life on the microeconomics level. Supply and demand, equilibrium, price discovery, labor and capital and most important of all, profits. The stock market is pricing in the Fed's decisions to raise interest rates which will INCREASE PRICES, LOWER PROFITS AND STALL ECONOMIC GROWTH.


This isn't an economics class and we don't live in a textbook.


Jay Powell and his colleagues need to look around and see that we have headwinds, not tailwinds in the U.S. and global economy. They just added to the headwinds and said they will continue adding to the headwinds in 2019.


In addition, the Fed doesn't see any issue with letting 30 billion dollars in bonds run off it's balance sheet per month. The net effect of this "controlled unwind" they call it is the biggest buyer of treasuries and mortgage-backed securities is now gone - not just buying less, but gone completely. What happens when the biggest buyer of an asset just leaves a market? A huge hole. This hole is an oversupply of treasuries, which will drive prices lower and yields higher. Prepare for liftoff and an inverted yield curve.


We now live in a rising rate environment with a Fed that doesn't understand basic economics. One of the first things students learn in Microeconomics is the concept of a tradeoff. The Fed is missing the key point that as they tighten economic conditions, this will hurt everyone, including people who hold pensions, 401ks, IRAs, and especially, business owners that are the backbone of the economy.


The tradeoff to raising rates is higher costs. The tradeoff to tariffs is higher costs. The Fed and President are working in tandem to all but stop economic growth. The consumer ends up paying for these policies. The dot plots don't matter when you can't buy a house or get a loan for a car or have your credit card interest payments go through the roof.


Let's hope the two most powerful people in the world reverse course soon and start looking at the reality and consequences of their decisions.

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