VTI - No New Move Necessary: Federal Reserve

2023-09-06 16:18:39 ET

Summary

• Christopher Waller, Board of Governors: the Federal Reserve should maintain its current monetary policy and not make any changes.
• The current stance of monetary policy appears to be achieving the Fed's goals.
• So, there doesn't seem to be any present need for the Fed to do anything else right now.
• But, the Fed needs to stay alert.

Should the Federal Reserve stay put for a while?

Christopher Waller, "among the most hawkish of the Federal Open Market Committee," stated on Tuesday that the Federal Reserve should keep its policy rate of interest not move its policy rate again in September.

The Federal Reserve, he said, was well-positioned to move "carefully" in its efforts at monetary tightening.

And, the statistics?

Well, the latest news on inflation was that the core consumer personal consumption price index showed a year-over-year increase of only 4.2 percent.

The second quarter increase, year-over-year, in real GDP was 2.5 percent.

Not bad.

And, the inflation rate has continued to decline.

The rate of real economic growth has tended to stay around 2.0 percent or above.

I have reported in my latest Seeking Alpha post that investors in the U.S. bond market have built-in expectations in the yield on the 10-year U.S. Treasury note (US10Y) that are quite positive in terms of economic growth and U.S. inflation.

The expected real rate of growth built into the bond yield is 2.2 percent and the expected rate of inflation built into the bond yield is 2.1 percent.

Market expectations are telling us that they believe the efforts of the Federal Reserve are going to be carried out and that inflation over the near term is going to return to a level near what the Federal Reserve wants to achieve.

Furthermore, the real rate of economic growth is expected to be around the same level it achieved in the full period of economic expansion following the conclusion of the Great Recession, which ended in 2009.

The compound annual growth rate of the U.S. economy following the Great Recession was 2.3 percent.

People were not happy with the slow growth during this period, but an analysis of the data, which I have presented numerous times, showed that the problem with economic growth was the lack of labor productivity growth in the economy.

Labor productivity growth for this period of economic expansion was the lowest level attained in the post-World War II period.

The explanation for this is attributed to the government's economic policy.

The major focus of the government's economic policy during much of the expansion during the 2010s was on the monetary policy being conducted by the Federal Reserve.

During the decade, the Federal Reserve entered into three periods of quantitative easing.

This seemed to be producing acceptable results for the government, but the focus of the government resulted in a change in focus for manufacturers.

What happened was that the Federal Reserve stimulus went into the financial sectors of the economy, and did not spill over much into the real sector of the economy.

As a consequence, the prices of financial assets rose and rose and rose. This is where the real money was being made, and sophisticated financial operators moved their money into financial assets to take advantage of the rising prices.

We saw a very large increase in income inequality in the United States as a result of this behavior.

The real sector?

Two things: the returns on the investment in physical assets were less during this period and the returns, also, varied to a greater degree. The price of financial assets went up and up and up. The profit results associated with the investment in real assets were highly variable.

Most found the outcomes in the 2010s quite acceptable.

Where would you put your money in an environment like this?

Now, where are we?

The Federal Reserve has been conducting a policy of "quantitative tightening" for about 18 months...a year and a half.

The Fed's policy rate of interest has risen by more than 500 basis points.

Financial markets seem calm and peaceful.

Financial markets have responded, as shown above, by moving expectations to a point that closely matches the goals of the Federal Reserve over time.

And, inflation has been decreasing in a relatively continuous fashion.

What more could you want?

Should the Federal Reserve stay put for a while?

Mr. Waller says,

"There's nothing that is saying we need to do anything imminent anytime soon, so we can just sit there, wait for the data, and see if things continue."

Sounds good!

For further details see: