Amid Record Stock Prices, Fed Policy Is A Risk
Stock prices have soared in 2019, breaking records repeatedly, and the latest economic signals — though less robust — indicate no recession is on the horizon. Perhaps the biggest risk threatening to end the 10-year old expansion is the Federal Reserve Board’s inflation policy.
The Fed incorrectly for over five years has predicted an inflation rate of 2%, and the central bank’s June 19 economic release was unrelenting in its forecast.
If the Fed’s 2% forecast had been correct since January 2010, the trajectory of the inflation rate would have looked something like this blue line. In fact, the actual rate of inflation, shown in red, has been approximating the 1.5% growth trajectory. The last time the Fed’s forecast for 2% inflation was correct was in 2011 and 2012, but the Fed’s forecast has been off year after year since 2013!
The Fed’s broken forecast for inflation has not ended the long expansion, but economic growth has slowed and the Fed’s policy has increased uncertainty. On December 19, 2018, amid the trade war with China and growing signs of a global slowdown, the Fed hiked lending rates; it caused a flash bear market plunge of 20% in stocks, chilled holiday retail sales, and growth in new jobs abruptly stopped. On January 4, 2019, the Fed did a complete about-face and Chairman Jerome Powell said plans to hike rates further were on hold, seemingly acknowledging that the Fed’s economic model was wrong. Since all recessions since 1954 were caused by a Fed mistake, the Fed is at a crossroads; its inflation policy in the weeks ahead will be key to the expansion continuing.
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