December 14, 2023 - 7:06pm
Well, that was sudden. After markets were in full-blown rally mode last month, there were fears that investors were getting ahead of themselves. But with inflation hovering at 3%, it was expected the central banks would want to dampen the enthusiasm in markets. Surely, the message they’d send was that it was too soon to uncork the champagne.
But no. At the conclusion of the US Federal Reserve Board’s Wednesday meeting, Chairman Jerome Powell more or less said “run with it.” The Fed didn’t actually cut rates and warned that future hikes were on the table: inflation was still too high and that progress towards its 2%-inflation target was “not assured,” Powell remarked.
Nonetheless, in the dot-plot of expected rate changes released, the Fed showed itself to be leaning towards rate cuts next year, with Chairman Powell saying that the Fed would need to cut rates “way before” inflation had fallen back to 2%. He added that there were also risks in keeping rates too high for too long.
Investors left the meeting feeling that Christmas had come early. The stock market shot up some 2%, and bond yields plunged. Come the morning, major investment houses were revising their market forecasts, predicting new record highs for the indices next year. Word was out: not only had the economy stayed out of recession, but the days of cheap credit were returning.
Running with the bulls at a time they don’t need help seems like a risky thing for the Fed to do. Maybe its board members know something the rest of us don’t, and the economy is slowing faster than we know. Or maybe the American central bank really has managed to pull off the “immaculate disinflation” that has been the dream scenario of every investor for the past year — bringing inflation and interest rates back down without tipping the economy into recession.
But it may also be that the Fed got just a bit ahead of itself. But one consequence is that Jerome Powell’s credibility is now on the line: if inflation does remain tenacious in the months ahead, the Fed will have to rain on everyone’s parade at some point.
Add to that the very delicate politics of 2024. Just imagine how a certain Republican challenger will regard the Fed engineering low interest rates and a booming stock market in an election year. Or what a president might do should the Fed be wrong, inflation lingers, mortgage rates bounce back up and the markets turn south.
The one thing Jerome Powell has ensured is that a lot of eyes will be on him next year. One can’t help but wonder if he’d have done better to say as little as possible and let matters take their course.
John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a religion (Simon & Schuster, 2017).
jarapley
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SubscribeIt does have the feel of capitalism being desperately wedded to its financial dimension. Wall Street essentially works not as a promoter of innovation but as an outfit desperate for banking conditions that permit the use of financial leverage to manufacture enhanced returns on normal performing enterprises.
All of the tech enterprise excitement has gone, with the victorious outfits now operating like textbook monopolists, erecting barriers to entry and controlling prices. Hence, the shareholder dimension being reliant on central banks creating conditions to trade on margin.
Modern finance has evolved from a system of directing capital towards the most profitable and innovative enterprises, into a rent extraction system. It has regressed from capitalism to feudalism.
It’s crony capitalism. It’s who you know, not what you know.
Yes, this has been the inevitable consequence of the 2008 bank bailouts. It turned the financial sector from a free(ish) market into an openly corporatist market the principle concern of which is the state and direction of central bank and government policy.
I do realise, of course, that the bank bailouts were not the origin of the corporatist direction of the banking industry: that had been started in earnest under the Clinton administration where the American government started interfering in credit markets so as to expand home-ownership, in particular forcing bank lending to people who could not otherwise pass the credit standards banks usually impose.
Similar measures were taken by the New Labour government in the UK and in many other Western nations. But 2008 was the last time that a market-based correction was actually possible as a means of fixing the damage done by corporatist infiltration. That opportunity was avoided, instead using taxpayer money to save failed banks from bankruptcy. It is a price we have all paid for since, and may yet still pay for in years to come. It has been a disaster.
I’m not looking at Powell. I’m looking at Yellen. She’s been given Get the Democrats to Win the 2024 Election schtick next year. Liqiidity will be more important than interest rates. I expect S&P to rally in Q1/2. Let’s see.
End the FED, its a scam
Investors left the meeting feeling that Christmas had come early.
The holidays are the perfect time to be exuberant, even irrationally so!
I can tell that an election is coming, the Fed, Yellen and the media are enabling the administration to open the voting cookie jar.
Err….. You don’t exactly have to be Nostradamus to forecast an American election……
I agree. There is no need for the Fed to make future predictions. Everyone knows that it will adjust rates based on economic performance and everyone knows that no one knows how the economy will perform.
Ya think??!! Boil that economy just enough for it to start to smell tantalizing, and the Dems stay in the kitchen. Or, the pot boils over, panic ensues, the Repubs win and whoops! Gotta throw the top back on quick, cool everything off, now it all stinks to high heaven, and the Repubs get the blame.
Cynical conspiracy, right?
We’ll see.
There are various sign that a US recession is perilously close, according to David Rosenberg. Maybe the Fed is reacting the same signals.
The Fed gets things right more often than it gets them wrong. In the investment world, I have learned that, following the Fed can be very profitable.