An Independent Federal ReserveSubmitted by Destination Wealth Management on July 11th, 2019
Chairman Powell from the Federal Reserve recently testified before Congress about the Federal Reserve's perspective on economic growth and inflation. In particular, he was asked about the independence of the Federal Reserve and if that is an important issue. His firm response was yes. He reiterated this perspective by saying that even if he was asked to resign, he would not.
The Federal Reserve was designed as an independent, autonomous agency focused on creating jobs and reducing inflation. It was intentionally structured as an agency to avoid any undue political pressure and has operated that way since its establishment.
The Federal Reserve is not without its critics. Many believe that the Federal Reserve should be subject to more oversight and this was a particular issue during the financial crisis when the Federal Reserve intervened significantly in 2008 and 2009. The balance sheet increase that the Federal Reserve implemented was controversial and many thought that this was an overreach by the agency. In essence, the Federal Reserve intervened in free markets and that was a controversial action.
Most recently, there is some criticism that the Federal Reserve was responsible for the downturn in the fourth quarter of 2018 when they signaled that they would likely raise rates significantly in 2019. Of course, in the first quarter of 2019 they reversed their tone and now are signaling that interest rates will likely go lower. Critics believe that they should be lower now. They believe the case for stimulating the economy through lower rates is strong enough to take action now.
As there continues to be dialogue about the independence of the Federal Reserve, keep in mind that political pressure goes both ways. There are economies where monetary policy is controlled by politics and that oftentimes results in unintended consequences. That's the reason why the Federal Reserve was set up as an independent agency; to avoid partisan pressure.
Remember that the Federal Reserve chairman is appointed by the executive branch and so there is some degree of control over the long-term perspective of the agency. However, sometimes appointees don't behave exactly as expected and that probably is why we are seeing these headlines as of late.
So, putting aside all the controversy, we analyze information and develop a perspective on what we believe interest-rate policy will be going forward. Our perspective is that we believe the Federal Reserve will lower rates this year though not as much as some would like. Our best-case scenario is two rate cuts. We believe it is likely in the next 90 days that rates will be cut at least once.
Interest rate policy matters. It is a key factor we look at as we invest portfolios. This includes equities as well as fixed income. We will continue to monitor speeches, testimony, minutes, and commentary of the Federal Reserve. This includes chairman's comments as well as governors’ comments. We will adjust as needed.
If you have any questions about this information, please let me know. Always here to help!