Out of the Box: Errors and Omissions
The Fed’s cut was in-line with consensus expectations. Their future outlook will certainly not please our President. Chairman Powell’s position that we are in a “mid-cycle adjustment” seems to be what has driven the Fed to their conclusion. This viewpoint, I believe, is in error.
What is missing in their statement is a recognition that American rates are so much higher than European and Japanese rates and the effect that this has on our economy. It is almost as if they are purposefully ignoring the collateral damage that this is having on the Dollar and on American corporations.
However, having said that, they still are fostering a “Borrower’s Paradise,” in the United States that both individuals and corporations should take advantage of now! This is while they have created the exact opposite condition for investors, who can only achieve very low yields and hence low cash flows. This is a marked negative for retirees, seniors, insurance companies, banks, pension funds, mortgage lenders and other companies in the financial industry.
With today’s statement the Fed has continued to foster a “Financial Paradox” where borrowers are empowered and fixed-income investors are pushed into the corner. We are, in fact, I would assert, between “a rock and a hard place.” The Fed has taken a very different position than the ECB and so our central bank is doing much less to help our economy than the European Central Bank.
Something, at some point, has got to give.
While our central bank is frittering, the European Central Bank is taking definitive action. Not only have they dropped their deposit rate to -0.50% but they have embarked on a new plan to give their banks new money in the hope that they will lend it to the banks’ customers. Yesterday the ECB handed out $3.8 billion to their banks at the rate of ZERO as they push sovereign debt and European corporate bonds even further into negative territory. They also recently announced the re-start of their Quantitative Easing Program where they will buy $22 billion of European bonds each month.
What the Fed doesn’t seem to understand is that they are America’s central bank and not the world’s central bank. The Fed was enacted by Congress in 1913 to protect American interests and we are being lambasted, at the moment, and not just by the Chinese. The ECB is doing everything possible to support the interests of the European Union and, in my view, we are engaged in a “Game of Thrones” not just with the Chinese but also with the Europeans.
The Fed seems to have no recognition of this at all. From their recent comments they are absolutely ignoring what the Europeans are doing and while they nod to global events that is about as far as they have gotten. They need to go much further, in their thinking, in my estimation, to protect American interests.
Americans, it is true, tend to be myopic in their vision about the markets. We are quite American centric largely because we have the world’s largest economy and the biggest markets and so we tend to not pay attention, as much as we should, to other markets. However, having recognized this, the Fed has to have a broader vision in a world that is bulging with various nations pushing and pulling for power and position.
Since the Fed was created by Congress, I see no reason why the President, or any Congressman or Senator, cannot publicly disagree with what the Fed is doing. The Fed’s creation also gives them independence to reach their own conclusions but the notion that the Fed cannot be questioned seems just lunacy to me.
“Whoever controls the volume of money in any country is absolute master of all industry and commerce.”
-President James A. Garfield
To the Fed I say, “Please pick up your mantle.”
Mark J. Grant
Chief Global Strategist, Fixed Income
B. Riley FBR Inc.
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