In the wake of Trump’s victory in 2016, there has been a shift away from faith and trust towards fact-based evidence. But what makes this skepticism different than previous times? How have we reached this point where facts are actually counterintuitive to many Americans? To find out more about how believers cope with hard truths, I interviewed several evangelical pastors who discuss their own experiences turning their beliefs into reality.
The “Federal Reserve interest rates” is a topic that has been in the news recently. Many people are wondering what it is and how it works. The Federal Reserve is an institution that sets interest rates, which are used to determine the cost of borrowing money. Read more in detail here: federal reserve interest rates.
Chairman of the Federal Reserve, Jerome Powell
Tom Williams/Associated Press photo
Is Wall Street beginning to trust the Federal Reserve? For weeks, officials have warned that the central bank will tighten policy quicker than many thought in order to get inflation under control. As a result, the ruckus among bond and stock traders after Chairman Jerome Powell’s reiteration of the commitment on Thursday has been delayed.
Mr. Powell all but confirmed the Fed will raise its policy rate by 50 basis points in May, more than the usual 25-point move. Stocks and bonds promptly tumbled, with the S&P 500 down 1.5% Thursday and another 2.8% Friday, the Nasdaq falling 2.1% and then 2.6%, and the 10-year Treasury yield spiking to 2.917% Thursday.
The market movements, which have just recently started to tighten, highlight the central bank’s credibility problem. Investors were taken aback on Thursday because they’d been conditioned to assume the Fed would always backstop the market with a put.
Who can blame the traders? The Fed has functioned as though growing asset values are a measure of its performance since the Alan Greenspan era. Mr. Powell postponed the end of the Fed’s quantitative-easing program’s pandemic-era asset purchases so he could warn markets about the impending shift. The 2013 taper tantrum, a poor market response to quantitative tightening, is already part of Fed legend, and markets know the Fed wants to prevent another one.
Bond markets are learning how to trade without the Fed sitting on the long end as the Fed accelerates the outflow of its QE portfolio. Investors may be coming to the conclusion that containing inflation would need higher interest rates and, at the very least, some economic hardship, if not a recession. Some may refer to this as a rout, but we like to refer to it as a market “signal.”
Equities may also be in for a harsh awakening. Investors who have pushed stock prices up over the last two years must now contend with the impact of increasing interest rates on valuations, as well as the risk of slower economic growth on profits. Oh, and Washington’s promise of greater taxes and more stringent regulations, at least until November’s election.
All of this will have to be ignored by the Fed as it fights inflation, particularly if it wants to maintain its credibility. Mr. Powell’s biggest difficulty, though, may be to remain firm. Market turbulence is expected to persist, and asset revaluation may result in one or more bank failures. Bank balance sheets are stronger than they were in 2006, and customers are better off financially, but we won’t know if they’re solvent enough until the end. As recent price increases slow, housing will be a question mark.
The international situation has never been more complicated. Europe is on the verge of a downturn. China’s zero-Covid restrictions are wreaking havoc on supply networks. The rapidly weakening Japanese yen (currently trading at less than 128 per dollar) is causing concern in Tokyo about the health of the world’s third-largest economy.
As the economy changes, investors might expect a few bumpy rides on the roller coaster. Mr. Powell, our suggestion is to let the markets establish their new balance on their own. The Fed’s primary responsibility is to maintain price stability. The Fed is in this bind because it took too long to reign in inflation, allowing markets to believe they had too much sway over his decisions.
Investors could contact their favorite retired bond trader who remembers the struggles of the 1970s and early 1980s. Everyone was encouraged to think such days were over by the Fed. On Wall Street, the 1970s are making a comeback.
Former Trump economics director Kevin Hassett is interviewed by Paul Gigot for the Journal Editorial Report. Images courtesy of Getty Images Mark Kelly’s composite
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The print issue of the April 23, 2022, was published.
