The Significance of Today’s Rate Hike

By James Rickards

This post The Significance of Today’s Rate Hike appeared first on Daily Reckoning.

The Federal Reserve, under new chairman Jerome “Jay” Powell, raised the federal funds target rate 25 basis points today. It was Powell’s first significant move as the new chairman of the Federal Reserve.

Let me first give my opinion of Jay Powell before weighing on the implications of today’s decision.

I worked with Jay Powell when he was at the U.S. Treasury and I was general counsel of a major primary dealer in government securities. The primary dealers act as underwriters at auctions of U.S. Treasury securities, so in effect, Jay was my firm’s biggest customer.

My impression of him was that he was highly professional and always acted in the best interests of the Treasury and the taxpayers. He’s smart, has integrity and has had a distinguished career both in public service and in a private capacity at investment funds and think tanks.

Jay Powell is someone who is well liked and well regarded by Republicans and Democrats equally. That’s a rare attribute in today’s deeply partisan political scene.

The most important fact about Jay Powell’s chairmanship is that there will be no change in monetary policy. As a Fed governor, Powell never voted against Janet Yellen on any interest rate policy decision.

His speeches always voiced strong support for Yellen’s approach. In short, Powell is, and will continue to be, “more Yellen” when it comes to Fed interest rate policy. The Fed chair has changed, but interest rate policy has not.

Beginning in December 2015, Janet Yellen put the Fed on a path to raise interest rates 0.25% every March, June, September and December, a tempo of 1% per year through 2019, until the Fed “normalizes” interest rates around 3%.

The only exception to this 1%-per-year tempo is when the Fed takes a “pause” in hiking rates because one part of its dual mandate of job creation and price stability is not being met. Lately job creation has been strong, but the Fed is facing head winds in achieving its inflation goal.

The Fed is targeting a 2% annual inflation rate as measured by an index called PCE core year over year, reported monthly (with a one-month lag) by the Commerce Department.

That inflation index has not cooperated with the Fed’s wishes and is still well below 2%. Both December and January’s reading came in at 1.5%.

This undershooting has been a persistent trend and should be troubling to the Fed as it contemplates its next policy move at the FOMC meeting on June 12-13.

But the Fed’s bungling should come as no surprise. The Federal Reserve has done almost nothing right for at least the past twenty years, if not longer.

The Fed organized a bailout of Long-Term Capital Management in 1998, which arguably should have been allowed to fail (with a Lehman failure right behind) as a cautionary tale for Wall Street.

Instead the bubbles got bigger, leading to a more catastrophic collapse in 2008. Greenspan kept rates too low for too long from …read more

Source:: Daily Reckoning feed

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