Last week we talked about a conspiracy theory that’s been circling around regarding the Fed Funds Rate and the upcoming election. This week, four different Fed folks spoke publicly that rate cuts won’t be coming down the pipe anytime soon. It wasn’t that long ago that Jerome Powell promised us three rate cuts this year, what’s the big deal in telling us when those might happen. It got me thinking, this cannot all really be as chaotic or disjointed as it feels.
My Theory: Something is missing.
These “high-ups” at the Fed are aware of how their comments whipsaw the markets. There is no reality in which they don’t watch that. It’s not like we’re talking about tweets from an old, out of touch orange guy with a mood disorder and possible delusion. Fed Chair Powell, Minneapolis Fed President Neel Kashkari, Loretta Mester the Cleveland branch chief and Fed Governor Adriana Kugler all spoke in separate places this week stating the Fed would be in no rush to lower interest rates and the market had quite the reaction to that.
It's dizzying.
And I think they know it. What I’m trying to figure out is what’s their angle. What is the strategy behind jerking us around like this?
When they know how much real estate fuels the GDP.
It is easy to recognize the direct contribution real estate plays in the overall health of our economy. In fact, I’ve written about it here. So did a famous economist Edward Leamer in his 2007 paper, “Housing is the Business Cycle.” His paper argues that housing has a fundamental role in driving economic cycles not just through the sale of homes and renovations and broker commissions – which amount to 3-5% of the GDP on their own. Not just through consumer spending on housing services which make up 12-13% of the GDP. But through indirect contributions like construction and retail sales and me and my friends in the financial services sector. The over impact of the real estate market on the GDP could be almost 20%.
So do not tell me the Fed is watching what is happening to us every time they pull some new rhetoric out of their ass.
I need your help.
I don’t know the answer to today’s question – What is the Fed’s strategy with the conflicting commentary. I know there is a strategy, I just know it. So please share your thoughts in the comments on what their play is.
Possible Scenarios:
They know that the Fed Funds Rate is not the only torture tool at their disposal. They also have a heavy balance sheet of bonds that they could offload and ruin our lives. Do they want to keep us on our toes?
The Federal Open Market Committee has twelve members from quite different economic, political and cultural backgrounds. Maybe they all really do just have different opinions.
The Fed is data dependent. And the data itself has been volatile. The economic outlook is uncertain, and they don’t have a crystal ball so we shouldn’t be so hard on them. We can’t expect them to rely on history because as we’ve discussed right here, history has never included a time like the past ten years. So they can only look forward to an unknown future.
Here is what I do know.
There isn’t just a disconnect between what the Fed is telling us and what they are actually strategizing. The data may suggest the economy is strong, but Americans don’t feel it. Even if they are meeting ends meat, they are nervous about what they think is an unstable economy. Why would consumer spending be so strong then? I think it comes down to psychology. (surprise, surprise – I know) Americans know something seems off and they should be planning ahead, sticking to their budget and saving when they can. They are just choosing to disregard that every time they feel bad about something else. The largest demographic of consumers has the worst case of Keeping Up with Joneses in the history of social climbing. They’ve also lived through so many Black Swan events and subsequent rescue programs from the Fed that they figure they’ll figure out the debt they are pilling up later. Consumer sentiment measures right now at levels similar to that off the end of a recession, rather than a year when a recession was avoided, and the economy actually grew 3.1%.
What to do with this information?
Consider how you’re approaching money at the moment. Are you nervous? Are you spending emotionally? Do you have a plan in place for at least two different scenarios playing out over the next year?
Scenario A: We avoid a recession, and the economy feels more stable. How will you take advantage of that opportunity to create wealth?
Scenario B: Things take a turn, and your gut instinct is right, we head for some stuff times. Will you be ready to take advantage of opportunities in this climate or will you be in panic mode?