David Jones  |  October 29, 2018

The Yellen Fed after many years of practically of zero interest rates finally boosted Fed Funds rates on December 17, 2015 and signaled four more increases in 2016.  This increase occurred during a rather shallow US economic recovery.  At the time of this rate hike the US economy was in its seventh year of economic recovery.  GDP at the time was positive by two per cent plus with an occasional flat quarter, while S&P 500 profits struggled to show any meaningful growth.  This increase caused turmoil in the financial markets, the dollar strengthened, equity markets declined,  problems in emerging markets were exacerbated and China’s problems became worse. At this time the US was heading into a sizable localized recession in several industries.  In February 2016 a G20 meeting convened in Shanghai and behind closed doors we don’t know exactly what occurred, but the Yellen Fed did not increase fed funds again until a year later.  Perhaps nothing took place but Yellen none the less walked back the idea of Fed increases. Lastly, the US economy came out of its doldrums later in 2016 providing a Yellen with a rationale for a second fed funds increase in December of 2016.  

On September 29, The New York Times featured an article on the front page of their weekend edition titled The most Important Least-noticed Economic Event of the Decade by Neil Irwin.  Irwin discusses the turmoil that caused interrelated weakening of global economies in 2015-2016.  This article helps explain the economic growth spurt of the last couple of years. I have posted this article on my Facebook page and will try to post it today on LinkedIn.  If you are a subscriber to the Times you can print out or read this rather lengthy, excellent piece.

The Jay Powell fed has increased rates six times since his appointment and promises to continue with increases.  Of course, the US economy is less fragile today than in the Yellen era; corporate earnings are tracking nicely, GDP is rising at more respectable rates and jobs in the US are more plentiful.  Jay Powell inherited a very different economy than Yellen, one that is powerful and growing. But, many of the issues that caused the turmoil in 2016 to the global economy are now present today.  Additionally,  certain interest rate sensitive sectors of the US economy are turning down namely the Auto and Housing sectors.  Unlike, 2015-2016 the current period’s profits trajectory has not shown any deterioration in the aggregate.

There are economists that take exception to the hawkish stance of the Fed, one is CNBC’s Jim Kramer who feels the fed is moving too fast and causing the current volatile market and could cause economic slowing.  Thus far Federal Reserve Governors are reluctant to comment on swings in the financial markets.  Of course the Fed is data dependent, hence they could change their policy if they feel that this tightening is causing a needless slump in the US economy.  Hopefully, these policy makers will be watchful and flexible.  Additionally,  they will be will be present at the next G20 meeting on November 30th in Buenos Aires when China’s Xi Jinping meets with Trump.  This will be an opportunity to discuss how interest rates are affecting global economies and important issues that affect trade.

Robert J Voccola,  CFA


Certain clients of MDX wealth Management are holders of the common shares of both companies as is the writer of this blog.