The Fed: "Take A Break, Mr. Powell"

Written by: Global Thought Leadership | December 21, 2018

Chart Courtesy of Brandywine Global Investment Management.  Source: Haver Analytics, as of 10/31/2018. * The policy interest rate refers to the Fed's target rate and  is adjusted for inflation using the U.S. Core PCE Price Index.  Past performance is no guarantee of future results. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.

 

THE BOTTOM LINE

  • Despite the widely-expected – and unanimous – decision to raise the Fed Funds target rate, financial markets reacted rapidly and negatively to the one-page statement, the press conference, and the fresh economic outlook unveiled on December 19th.
  • The reaction has been characterized by some as an “emperor-has-no-clothes” moment, as the FOMC confirmed that the U.S. economy is no longer keeping up its blistering 4% annualized growth rate from Q1 2018.
  • Brandywine Global Managing Director David Hoffman recently observed that even before the December 19th decision, the U.S. policy interest rate – the Fed Funds target rate when adjusted for inflation – had already moved upward to zero, as shown in this week’s chart, and appears now be moving from accommodative to restrictive – i.e. no longer broadly promotive of continued strong growth.
  • In his view, the transition has been on its way for months, as the effects of the Fed’s hikes during the previous year have taken hold – with the “canary in the coal mine” for the impact of rising rates being the decline in sales of U.S. existing  homes. Rising mortgage costs have raised the total cost of ownership – thereby lowering prices, but not by enough to make up the difference.
  • Hoffman's conclusion: the economy is no longer in a position to absorb additional rate hikes at this stage of the economic cycle. His advice: “ Take a break, Mr. Powell” .

 


Definitions:

The Federal Open Market Committee (FOMC) is a policy-making body of the Federal Reserve System responsible for the formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

The Federal Funds rate (Fed Funds rate, Fed Funds target rate or intended Federal Funds rate) is a target interest rate that is set by the FOMC for implementing U.S. monetary policies. It is the interest rate that banks with excess reserves at a U.S. Federal Reserve district bank charge other banks that need overnight loans.

 

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