Economic Commentaries

Entries for March 2019


To say that relations between the Federal Reserve and the administration are strained is an understatement. This is despite the fact that the Chairman and several Board governors are administration appointees. We are certain there was never any quid pro quo in these selections. We are sympathetic to the administration's criticism, but we are opposed to displays of animosity.

Monetary policy actions have played a role in financial market turbulence and the beginnings of noticeable economic weaknesses. But equally if not more important are simmering trade tensions and a heightened sense of chaos within the White House. We will not comment on the last item but the other two deserve some scrutiny. From our vantage point economic growth peaked in the first quarter of 2018 as the housing market began to reel from rising interest rates and a misguided tax overhaul. Additionally global trade flows began to contract as fear of supply chain disruption surfaced; tariffs were openly discussed and threatened; and a fundamental sclerosis became visible across Europe. On again off again Brexit headlines have not helped.

Since the spring we have warned that the Fed's two pronged strategy of raising interest rates and contracting the balance sheet would be too much for a still fragile U.S. and global economy to absorb. From its verbiage it seemed obvious the Fed never bought into the idea that tax cuts and deregulation could foster a step up in growth without inflation. But a step up in growth is necessary if a soon to be uncontrollable federal budget deficit is ever to be reined in. Meanwhile, inflation has yet to assert itself and if economic conditions continue deteriorating, inflation pressures will remain dormant.

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