After a level of hype that would have
exhausted even the most dedicated Star Wars fans, the Federal Reserve finally began
to tighten monetary policy last week, raising the funds rate from 0.25 percent
to 0.50 percent.
Although financial markets appeared sanguine
when the rate hike was announced, the calm dissipated quickly. The Standard
& Poor’s 500, Dow Jones Industrial, and NASDAQ indices finished the week
lower. International markets fared better. Most finished the week higher.
The last five times the Fed has begun to
raise rates, the U.S. dollar has remained stable and stock prices have risen,
on average, in the months immediately following the hike, according to The Economist.
While tightening monetary policy (and talk of
tightening monetary policy) often affects financial markets immediately,
economic change happens at a more measured pace. The Economist explained:
“The impact of changes in interest rates is
not usually felt on announcement…The response of the real economy also comes
with a delay. Most reckon it takes time for monetary policy to shift spending
habits, and one rate rise is more an easing of the accelerator than a U-turn.
Unemployment continued to fall in each of the past five tightening episodes.
That will probably happen again...The most uncertain variable is inflation.
This fell rapidly following rate rises in 1983 and 1988 as the Fed established
its hawkish credentials. Yet in 2016, the most likely direction for inflation
is up (the rate rise is aimed at restraining its ascent).”
Another factor affecting the U.S. and global
economies is the price of oil. Last week, The
Wall Street Journal reported oil prices declined to a new six-year low.
Falling oil prices have contributed to deflationary pressures in Europe, stunting
the region’s economic recovery. They have had a mixed affect on the U.S.
economy, helping consumers and hurting the energy industry.
Second guessing the fed is an age old American
pasttime. Americans
have been speculating about the Federal Reserve’s monetary policy choices – rate
hikes, rate declines, quantitative easing, etc. – for a long time. It’s clear
when you take a look at a few modern Fed Chairs and the Fed’s activities under
their leadership.
Paul Volcker (1979-1987) took over an economic quagmire
known as The Great Inflation. In the early 1980s, U.S. inflation was 14 percent
and unemployment reached 9.7 percent. Volcker unexpectedly raised the Fed funds
rate by 4 percent in a single month, following a secret and unscheduled Federal
Open Market Committee meeting. His policies initially sent the country into recession.
The St. Louis Fed reported "Wanted" posters targeted Volcker for
"killing" so many small businesses. By the mid-1980s, employment and
inflation reached targeted levels.
Alan Greenspan (1987-2006) was in charge through two U.S.
recessions, the Asian financial crisis, and the September 11 terrorist attacks.
Regardless, he oversaw the country’s longest peacetime expansion. In the late
1990s, when financial markets were bubbly, critics suggested, “…Mr. Greenspan’s
monetary policies spawned an era of booms and busts, culminating in the 2008
financial crisis.”
Ben Bernanke (2006-2014) took the helm of the Fed just
before the financial crisis and Great Recession. When economic growth collapsed
in 2007, the Fed lowered rates and adopted unconventional monetary policy
(quantitative easing) in an effort to stimulate economic growth. In 2012,
economist Paul Krugman called Bernanke out in The New York Times, “…the fact is that the Fed isn’t doing the job
many economists expected it to do, and a result is mass suffering for American
workers.”
Janet Yellen (2014-present) is the current Chairwoman of
the Fed. Under Yellen’s leadership, after providing abundant guidance, the Fed raised
rates for the first time in seven years. The International Business Times reported several prominent economists
think the increase was premature, in part, because there are few signs of inflation
in the U.S. economy.
In many
cases, it’s difficult to gauge the achievements and/or failures of a leader – Fed
Chairperson, President, Congressman, or Congresswoman – until the economic or
political dust settles. Sometimes, that’s long after they’ve left office.
Weekly
Focus – Think About It
“We
are too prone to judge ourselves by our ideals and other people by their acts.
All of us are entitled to be judged by both.”
--Dwight Morrow, former U.S. Ambassador to Mexico
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