WHAT COULD POSSIBLY GO WRONG?
Financial follies and disaster in the making
“What do you do? You slow down, and you maybe go a little bit less quickly, and you feel your way more. So under uncertainty of this kind, you be careful.” That’s a strong hint that the pace of rate hikes will likely slow down in 2019. And Dallas Fed President Robert Kaplan took a similar approach in an interview with CNBC last week: “Fiscal stimulus is waning, and we’ve raised rates eight times over the last two and a half, three years... I think all of that means we ought to shorten up on our assessments and be willing to be very patient.” In other words, the Fed appears to be on the verge of taking a reactive “wait and see” approach with its grand monetary experiment just as cracks start to appear in the broader economy... And recently, the U.S. Department of Labor reported that the rate of hiring slowed during the month of November... Economists expected a gain of 190,000 jobs during the
Cracks in the broader economy... One of the Federal Reserve’s favorite ways to stimulate the economy is through “quantitative easing” – things like maintaining artificially low interest rates or printing more money. From 2008 through 2015, the Fed kept the benchmark interest rate near zero. And despite eight increases since December 2015, this rate has remained below the rate of inflation. In other words, “real” interest rates – rates that account for inflation – have been negative or zero during that entire stretch. The Fed needs to raise rates so it can cut them again during a financial crisis... But it also needs to avoid causing the crisis itself. You see, after years of steadily increasing its rate hikes, the Fed has abruptly struck a more “dovish” tone. In a recent speech, Fed Chairman Jerome Powell likened the shift in policy strategy to walking into your living room when the lights suddenly go out. As he explained:
12
December 2018
Made with FlippingBook - professional solution for displaying marketing and sales documents online