25 Bps… No takebacks! Ooh it was a mistake.
“The system of unlimited liability is that which fosters the most speculative management. It is a system which makes bankers out of men who have nothing to lose…”
Having opined in the past about the Fed’s role in causing recessions, I won’t be blaming restrictive monetary policies if a recession is on the horizon. The Fed’s takeback of 25 bps at their last meeting was labeled preemptive, but it seemed as though the markets (both bond and equity) were exerting greater influence on the rate cut decision than seemed necessary.
Former Fed Chair Alan Greenspan once revealed that the last rate hike in a tightening cycle is “usually a mistake”, but last December’s increase of 25 bps certainly seemed warranted based on what we knew then or at least what the data was telling whoever it is that looks at the data. But looking at the funds rate in real terms, at the peak last month the rate was 2.4% and year-over-year CPI was only 1.9%. This means the real funds rate was 0.5%. This is hardly restrictive and not even close to the level of real rates that have triggered previous recessions.
What’s to worry about when monetary policy is less restrictive? Plenty with an economy on solid footing. Asset price bubbles, inflation, and confidence that the Federal Reserve Board is acting independently within their mandates, not under the influence of any group, public or private.
If we want better performance for our economy, then help for the manufacturing sector is needed and achieved by solving our trade issues. The tail that wags the dog need not be a 6% drawdown in our equity markets, nor a yield curve that reflects the poor policies of the rest of the world.
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