With a recent U-turn on his plan to continue raising rates and trimming the Fed’s balance sheet, Fed Chairman Jerome Powell is targeting higher inflation rates. The policy runs the risk of inflating an asset bubble. Bloomberg’s Rich Miller reports:
The Federal Reserve risks stoking the same sort of asset bubbles that Chairman Jerome Powell has linked to the last two recessions with its new-found eagerness to fan inflation.
The Fed’s surprise pivot away from any interest rate increases this year has boosted prices of stocks, high yield bonds and other risky assets in spite of nagging investor concerns about slowing global economic growth. Financial conditions, at least as measured by the Chicago Fed, are at their easiest since 1994. And they could well get looser.
“If by late spring it feels like growth is picking up and the Fed is on hold, the markets are going to say Goldilocks is back and it’s risk on,’’ said former Fed official Nathan Sheets, who is now chief economist for PGIM Fixed Income.
That would put policy makers in a pickle. In unveiling the Fed’s U-turn last month, Powell highlighted the central bank’s determination to promote price pressures by declaring that low inflation was “one of the major challenges of our time.’’ And he left open the possibility that the Fed’s next rate move might be a cut after four increases last year.
Egging on Powell is President Trump, who has encouraged the Fed chairman to keep rates low to get the economy moving even faster. Trump has grown frustrated with Powell. The Wall Street Journal reports:
President Trump is blaming the Federal Reserve for holding back the economy and stock market despite the central bank’s recent decision to do two things he wanted—halt rate increases and stop shrinking its asset portfolio.
The president blasted the Fed and Chairman Jerome Powell at three meetings in the past week alone, telling Republican senators, supporters and staffers that if it wasn’t for the central bank’s past rate increases, economic output and stocks would be higher and the U.S. budget deficit would be rising less.
“He was pretty rough,” said one person who directly heard the comments at one of the meetings. Mr. Trump also blamed Treasury Secretary Steven Mnuchin for recommending Mr. Powell for the top Fed job. “Mnuchin gave me this guy,” Mr. Trump said.
Mr. Trump recalled a recent phone conversation he had with Mr. Powell, this person said. “I guess I’m stuck with you,” the president recalled telling Mr. Powell. The Fed chief took a brief phone call from Mr. Trump on March 8, a Fed spokeswoman said when asked about the conversation, declining to elaborate further. The phone conversation hasn’t previously been reported.
Read more here.
Jeremy Jones, CFA
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