Chairman Powell in between a Rock and a Hard Place
So, you’re the new kid on the block and your job is to drive a strong U.S. economy. It’s not an easy gig and Powell is faced with three major problems.
Problem #1: Doing what you say you will do…
The markets hate it when things aren’t predictable, and they rely on financial leaders to be able to adequately forecast what they plan to do next. This is especially important when Trump and the Republican party are at odds because this presents a wild card scenario. Throw on some tariffs that create opportunities for trade wars and the markets cringe at the potential impacts. Powell needs to position himself as a leader who knows what’s happening, how to manage key issues and demonstrate he can deliver.
Problem #2: The data doesn’t squarely support raising rates
We are still seeing the effects of unraveling quantitative easing (where Fed invested in Bond market to pull rates down) which has moved rates steadily upward. Meanwhile, the economy is doing well but we’re starting to see some financing program changes that feel similar to what happened prior to the mortgage collapse ten years ago. This includes the loosening of Underwriting guidelines (e.g., you can have more debt than you used to) and an increased use of ARM products. It makes me wonder if people are making desperate moves to get into a home and that can put clients (and Banks) in a risky situation in a downturn.
Problem #3: Lack of consensus among Fed Reserve
There are several cooks in the kitchen, among them the Regional Presidents who make up the voting body of the Fed Reserve. Powell has to herd the cats and gain alignment on both the long, and short-term, agendas. This is not an easy task, especially when financial data is mixed, and economic stability varies by geographic area. In public statements, everyone is saying rates need to go up, but the how and when vary by voting member. I do think rates are posed to go up, but I would forecast no more than .125 to .25 at each opportunity the Fed has to do that.
Photo credit: https://en.wikipedia.org/wiki/Jerome_Powell
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