The Fed’s Gonna Need Bailing Out
In reciting his tight-lipped opening remarks on Capitol Hill yesterday, investors believe they heard Jerome Powell sneak in a “help me.” The Fed Chair is back in Washington to testify on the state of the US economy, and in particular, how he plans to fight the next recession.
Were stocks to drop, the Federal Reserve would try and get them up again by lowering interest rates. Starting a business, buying a house, or making a big investment is much less perilous if done with a loan that carries cheap interest payments. Sentiment would strengthen, bulls hopefully outnumbering the bears again to get markets moving the right direction.
However, keep rates too low for too long, or fail to hike them when confidence is already high, and you get today’s world.
In the view of Superinvestor Charlie Munger, who spoke yesterday, you get “wretched excess.” So, sitting before the Financial Services Committee with interest rates only about half of what he would ideally like, Jerome Powell broke out the unprecedented plans B, C, and D for combatting a crash.
Plan B: Call on Congress. Tax cuts from the White House and defiantly built new bridges, roads, and schools, can also re-inspire confidence during a downturn.
European Central Bank head Christine Lagarde just requested this state support in less uncertain terms. “Monetary policy cannot, and will not, be the only game in town.” Bank of England governor Mike Carney also welcomes the UK’s proposals to spend.
Plan C: Tax cuts and new bridges from the government, but the Federal Reserve puts up the money.
Given the importance of Fed independence (imagine flunking long-term stability just to juice 401ks to make the president look good…), this is the last resort. “This is really an untested and not widely supported perspective,” said Powell yesterday.
Plan D: Quantitative easing. If central banks save up their pennies when times are good, they can buy bonds when times are bad, forcing down long-term interest rates, which usually force down short-term rates.
This is only a holdover move, and JayPow held firm yesterday that investors would not find alpha by stuffing cash under the mattress. Negative interest rates are a “no.”
At the end of the day, the next recession will force people to do what they don’t want to do. There’s no timing it, so everyday investors ought to stick the course, ride each wave as it comes, and enjoy the show!
