Don’t fight the Fed.
“The Fed”, the informal reference to the central banking system of the globes largest economy formed in 1913 to make the financial system of the U.S. more safe, stable, and flexible. Sometimes “the Fed” refers to a single man, the Chairman of the FOMC. Today, that person happens to be Jerome Powell and nobody I know wants to pick a fight with him. So, what does it mean when you hear “don’t fight the Fed”? It is a mantra that suggests you align your choices with the actions of the Fed. This means you should invest aggressively when rates are low, and conservatively when rates are high. Nonsense! You should never invest in a manner inconsistent with your tolerance for risk, and when possible, invest with a goal in mind. Additionally, “don’t fight the Fed” is simply not a perfect science. From March 16th, 2022, to February 1st, 2023, the Fed raised interest rates 4.5%. Half of the increases happened between March 16th and July 27th when the S&P 500 dropped 7.6% and the other half occurred between September 21st and February 1st when the S&P 500 rose 8.71% according to Yahoo Finance charts. Looking at this last rate hike cycle it appears the age-old mantra “don’t fight the Fed” gives us a success half of the time.
The Powell Doctrine
After spending countless hours combing through the public domain looking for someone who has identified the “Jerome Powell Doctrine” I fear that I have come up empty handed. Perhaps that is because some feel he could have done a better job. Consider me an interested party who was once critical of Chairman Powell for not acting sooner but now open to new ideas on how and when the Fed acted. Once inflation hits the target rate we will be in a better position to judge. I have become less critical after seeing inflation drop from its peak of 9.1% in June 2022 to 6.4% in February of 2023. We still have a way to go, but we are heading in the right direction. Most Fed chairs in modern history have made their mark on it. Since I may be the first to identify the “Powell Doctrine” I will describe it as simply waiting until you see the white of inflations eyes, then hit it with the biggest hammer you can find. In time we will see how that works.
Other fed chairs
Fed Chair Bernanke gave us “quantitative easing”. It can get complicated but in short, he needed to stimulate the economy so he cut interest rates to 0%. 2008 was a challenging time and cutting interest rates was not enough. Quantitative easing contributed to the economic recovery that followed. Prior to Bernanke we had Greenspan. In contrast to his successor, his policies were not very complicated. Chairman Greenspan was difficult to understand. His language was dubbed “Green speak” because it appeared complicated. For the exception of 1994, he raised and lowered interest rates often, and in small increments. This was the practice well before Greenspan in the 1970’s and proved ineffective for taming what seemed to be a decade of inflation. In 1996 Greenspan gave his irrational exuberance speech which resulted in 3 straight years of rate hikes followed by the same amount of time cutting rates. And finally in our little walk down Fed memory lane we have Paul Volcker, the great inflation fighter. Chairman Volcker in the early 1980’s put an end to inflation when he slammed the brakes on the economy and increased interest rates to an unthinkable 20%. By 1983 inflation retreated to just over 3%. It will be interesting to see how history treats Chairman Powell. If Powell is able to tame inflation without the economy going into recession he will likely be treated well by historians.
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