The Fed Is Freaked Out
by Larry Kudlow January 29, 2016
Early in the new year, on Sunday, January 3, Federal Reserve vice chair Stanley Fischer delivered a hawkish speech to the American Economic Association. Completely misreading the economy, which is woefully weak while inflation is virtually nil, Fischer strongly hinted that the Fed would be raising its target rate by a quarter of a percent every quarter for the next three years.
The next day the S&P 500 dropped 1.5 percent. In the week that followed, the broad index fell 6 percent. The week after that it fell over 2 percent. During that two-week period, the Dow Jones dropped 1,437 points.
The dollar went up. Oil plunged 21 percent. Raw-material commodities dropped. And credit risk spreads in the high-yield junk market rose substantially.
Actually, it was a global event, as stock markets around the world plunged. Utter chaos.
This past week, the Fed retreated in its FOMC policy statement. For the first time in a long while, it didn’t bother with a risk assessment between inflation and employment. The whole statement had a much softer tone. It reminded me of the prevent defense of the old Bill Parcells New York Giants.
Putting it more starkly, I’d say the Fed is completely freaked out by financial markets that are turning against it.
The central bank says its policies are “data driven.” But the recent FOMC statement suggests the Fed is looking at everything. It has a hundred indicators — domestic, international, jobs, and inflation. In truth, it doesn’t know what its next move is going to be because it can’t read the economy. Fed policy is opaque, confusing, and rudderless.
Take a look at the new GDP report for the fourth quarter of last year. A mere 0.7 percent growth. Across 2015, real GDP grew 1.8 percent. It’s not a recession. But any shock could push us into recession.
Business investment fell. Commercial building fell. Inventories fell. Inflation came in less than 1 percent.
Nominal GDP — real output plus inflation — registered a small 1.5 percent gain. In normal times, money GDP should be between 4 and 5 percent.
Perhaps most troublesome to the stock market and the economy is the decline in corporate profits. According to most estimates, profits are set to drop for the third straight quarter while business sales look to be falling for the fourth straight quarter. Add this to less than 1 percent economic growth, and the risk of recession is surely rising.
The recession threat is a risk, not a fact. With ultra-weak economic growth and ultra-low inflation, how could the Fed, or any central bank, think about tightening policy? For Fed policy makers to tell us the economy is healthy is a complete misreading of the situation.
I get a kick out of Kudlow claiming that the Fed is "misreading" the situation rather than simply telling the truth....they are lying through their teeth about the state of the economy and are now completely bereft of policy tools in trying to hype and prop up the "you-know-who economy".
Here's a little hint for you uneducated types...no, the stock market isn't an indicator of how healthy the economy is, per se. It is far MORE a reflection of how great the hype surrounding it happens to be at any given moment. That the Fed has unreservedly been robbing America of it's future fiscal health to reward the "too-big-to-fail" banks tells you everything you need to know about what is to come next. And guess who nominated those who have run the Fed since Greenspan?