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Propped-Up ?


It seems like a long time since December, which was the last time the Fed raised interest rates.  The stock market promptly had a “hizzy-fit” (whatever that is?), and the President began threatening to fire the Chairman of the Fed.  This week, the Fed had its normal policy meeting and strongly suggested it would cut interest rates at the July meeting.  Wall Street loved it!  This, plus the Trump-tweet that he was meeting with Xi at the G-20, was an overdose of “hopium” for the market, which is up almost 500 points this week.

Remembering the Fed has a dual mission of controlling both inflation and unemployment, the Fed is taking the unusual position of cutting rates to encourage more inflation.  It is hiding behind its dual mandate.  Everyone knows too much inflation is bad, but so is too little.  Once deflation starts, it is much more difficult to stop than inflation.  Our inflation rate has been greatly reduced by technology and globalization, over which the Fed has very little control.  I wish them good luck!

Lowering interest rates normally causes the currency to depreciate, and sure enough, the dollar has slipped since the meeting.  This should help improve the President’s negotiating strength with China at the G-20 later this month.

Reflecting the drag on the economy from the trade war, the Fed’s changed its description of the economy from “solid growth” to “moderate growth.”  Reasonable!

Frankly, I am disappointed that, ten years after the Global Financial Crisis of 2009, the Fed has to reassure the stock market that it will intervene to prevent another recession or another market collapse.  The operative phrase is “provide accommodation,” meaning we can see lower rates and more quantitative easing.  (The Fed Head hinted that quantitative tightening would end soon, maybe even this summer.)

When will the economy stand on its own two-feet, without a stimulative monetary policy AND a stimulative fiscal policy?

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