These comments are prompted by a recent Wolf Street post noting growing opposition to the Fed’s recent incursions into the financial markets:
In it, Wolf Richter cites recent media appearances by Chairman Jerome Powell:
“He admits that the Fed’s policies have increased asset prices, then says the Fed as a matter of policy doesn’t comment on asset prices, and hence cannot comment on asset bubbles, but then assiduously denies that this increased wealth of the asset holders, which he admits the Fed has engineered, widened the wealth inequality to the majority of Americans who hold no or nearly no assets, and who got shafted by the Fed.”
This part in particular exposes a line of nonsense that begs for vigorous challenge. The Fed’s policies indisputably affect asset prices, but the Fed will have nothing to say about them because they’re beyond its remit?
The pushback you’re getting says this is unacceptable, Mr. Chairman. You don’t have to express an opinion on whether asset prices are too high in order to acknowledge the fact that your policies are inflating them. This was an explicit objective cited by your predecessor Ben Bernanke and you have to be living under a rock not to know it’s not happening now. It’s inflating the wealth gap, creating historic debt, and making it impossible for today’s investors to look forward to anything but dismal future returns.
Two years ago you committed to normalizing interest rates. You were right to embark on that program. Abnormal interest rates are simply not compatible with a normal, healthy economy. We had a healthy economy throughout most of the 1980s and 1990s with much higher interest rates than we had over the 2010s. The ultralow rates of those 2010s saw growth atrophy and productivity sag.
What happened to that program? Apparently asset prices mattered then, because after a mere 20% decline in stock prices you abandoned it. Okay, maybe that was helpful feedback, but did that mean rates had to decline? And rapidly push stocks to new all times highs? Then again this year, why was it not enough to merely arrest the crash but again race to new records?
It would be different if we had evidence that lower rates actually helped, but the evidence just isn’t there.
We can’t help but notice not only that the Fed is targeting asset prices, but that the reaction function is lopsided. Price declines are met with a vigorous policy response, but runaway rallies are either met with indifference or outright support.
And this 2% inflation goal, arbitrary and unsupported to begin with, now seems not enough, because you’re twisting yourself into rhetorical pretzels trying to edge it higher. We can only conclude that it’s really just a cover story, an attempt to package ever more reckless Fed policy in a statutory mandate wrapper.
You have a historic opportunity, Chairman Powell. You can be our era’s Paul Volcker or its John Law. Renounce that 2% and tell us instead that you recognize that price stability means price stability. And it doesn’t have to be all at once, but tell us you realize that a normal healthy economy means normal healthy interest rates. Buy and sell legitimate monetary assets like Treasuries and gold if it’s called for, but commit to refraining from messing with the private capital markets and staying clear of corporate securities, mortgages and the like. You can either reaffirm the kind of leadership you demonstrated in the second half of 2018 and lay the groundwork for long term prosperity, or continue to play ATM for Wall Street and Washington and wreck the American economy for what could turn out to be years if not decades.