U.S. stock markets did not do very well on Monday, August 5, 2024.
The headlines and articles all over the place the next day tended to focus on one thing… the Federal Reserve.
The Federal Reserve held its Open Market Committee (FOMC) meeting last Wednesday, July 31, 2024.
The FOMC did not lower the Fed’s policy rate of interest.
Investors were disappointed.
U.S. stock markets closed DOWN the following three trading days.
The investment community got some other news following the information received from the FOMC.
For one, the unemployment rate rose again and job openings fell.
The decline in U.S. markets has been followed by falling stock markets around the world.
Discussions have followed… is the Federal Reserve “behind the curve” in lowering its policy rate of interest.
Questions followed… will the Fed call a special meeting to lower its rate?
Will the Fed wait until the September FOMC meeting and raise its policy rate of interest by 25 basis points? By 50 basis points?
Will the Fed raise its policy rate a second time in 2024? Will the increase be 25 basis points or 50 basis points?
And, what about next year?
The Federal Reserve dominated the discussions about the future of stock market prices.
Problem
The evolving dilemma is something the Federal Reserve has always tried to avoid in its policymaking efforts.
When I was a member of the Federal Reserve System, the Federal Reserve always wanted to avoid the headlines. The feeling was that investors should concentrate on the companies they invested in and on the state of the economy, and should not put the Fed “on the block” to be held responsible for outcomes.
But, the current Federal Reserve is working under a different approach. The Federal Reserve is conducting its policy effort, its quantitative tightening, that has now been going on for over two years.
The second component of the Fed’s current approach is about “forward guidance”. That is, the Fed feels it needs to be in front of the investment community informing them as to where Federal Reserve officials are and what they are feeling about future movements in policy measures… like the Fed’s policy rate of interest.
This current approach to the Fed’s policy efforts was introduced by Fed Chairman Ben Bernanke around the time of the Great Recession taking place in the U.S.
Mr. Bernanke wanted Federal Reserve efforts to be geared to generating a consumer wealth effect by stimulating a rise in consumer assets, stock market prices being one of the major targets of the program.
The idea was that rising stock market prices would increase consumer wealth and consumers would spend that increased wealth on consumer goods, thereby stimulating greater economic growth.
This was the main thrust of the policy. And, the Federal Reserve has now gone through four rounds of quantitative easing before getting into the current round of quantitative tightening.
But, as a part of the plan, Federal Reserve officials needed to be in regular discussions and forward guidance, that would help those investors and others interested in economic affairs, understand what the Fed was doing, or, what the Fed was going to be doing, to smooth out the functioning of the financial markets.
And, it is this latter activity that is resulting in all the “press” that the Federal Reserve is getting.
This is the type of problem that the Fed wanted to avoid when I was working for the Federal Reserve System.
This is the type of problem that creates dilemmas for central bankers.
Moving Forward
The question now becomes one of how and when does the Federal Reserve move forward in conducting its monetary policy.
Oh, by the way, there is another concern that is arising this time around the policy decision.
There is a presidential election coming up in a couple of months.
How does this event impact what the Fed does and when the Fed does it?
But, first, there is the issue of the state of the economy.
Does the Federal Reserve really need to reduce its policy rate of interest?
I have been one of the people sticking with the Fed’s game plan.
I have not seen a reason yet, for the Federal Reserve to reduce its policy rate of interest.
I would hate for the policy rate of interest to be reduced because the Fed needs to prevent a stock market collapse… a collapse that might lead to a further financial collapse.
I don’t reject the possibility that the Federal Reserve might have to “save” the market by cutting its policy rate of interest by a “major” amount.
If this were to happen, I would argue that it was the Fed’s way of conducting monetary policy at this time, that put the Fed in a position where it needed to “save” the market by dramatically reducing its policy rate of interest.
This situation could have created panic in investors that overreacted to the current situation.
What I see at this time is a U.S. economy that is relatively strong, and is growing at a modest rate of growth, a rate of growth that can be maintained in the near future.
I have written about this economy regularly. I have written about a “new” economy, one that has information technology as its foundation, one that has a continuous focus on the generation of “new” technology, and one that financially positions itself to keep the innovation going quarter, after quarter, after quarter.
I see a Federal Reserve that has adapted its policymaking efforts to support this kind of economy. I have written about this type of economy regularly.
The Federal Reserve must not be forced to overreact to the type of situation it now finds itself in.
The investment community must not try to direct the Federal Reserve in terms of its policymaking.
The Federal Reserve, over the past fifteen years or so, has introduced its current approach to monetary policy and has carried it through several very difficult economic situations, including the COVID-19 pandemic, an economic recession, and an economy in transformation.
The Fed, during this time, has seemed to build up a major amount of trust within the investment community.
The Federal Reserve needs this investment community to stick behind the Fed at this point when the Fed is facing a highly uncertain future.
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