A Contrarian View on the Economy and the Fed
Author: Greg Valliere
March 22, 2019
WE LOVE CLIENT EMAILS, what a bright and provocative group of readers . . . We were particularly taken by an email yesterday from one of America’s leading economists, who has a very different take on this week’s Fed decision. We summarize his thoughts — anonymously — below.
THE ECONOMY IS POISED TO REBOUND, amped up on Fed stimulus, the economist writes, because the Fed “caved” to Donald Trump, which “will be remembered as similar to the relationship between Chairman Arthur Burns and President Nixon; the latter leaned on the Fed, which responded with dovish policies in the early 1970s. “The Powell ‘put’ is even stronger than Janet Yellen’s,” this economist asserted, “which is what you get when you appoint a lawyer to head the Fed.”
IT TOOK THE STOCK MARKET A DAY to recover from its “what does the Fed know that we don’t know” initial reaction, but by yesterday it was clear that stocks (except, perhaps, for financials) should benefit as the economy re-accelerates this spring, our friend writes.
S&P FORECAST: “When consumer spending and housing and real GDP accelerate in the second quarter it will be ‘risk on’ big time,” he said, adding that the S&P could hit 3,000 this spring even without help from financials. The index presently is at 2855; our friend wrote yesterday morning, before the latest rally.
WHAT ABOUT INFLATION? It could become a risk, this economist said. “Gasoline prices are headed to at least $3 per gallon by Memorial Day, so headline CPI and the personal consumption expenditure deflator (the Fed’s favorite gauge) will get a big boost in coming months, which the central bankers should like. The Fed wants the PCE indicator to surge above 2% by the fourth quarter, the economist said, “although they will not forecast that.”
WEDNESDAY’S EXTRAORDINARY FED ACTION “guarantees no recession in 2019 or 2020,” despite a flatter yield curve, the economist said. “Indeed, if the curve inverts, the FOMC will cut the funds rate once or twice and will pump up the economy and inflation by weakening the dollar (as we pointed out yesterday) and boosting interest rate-sensitive spending and raising stock and commodity prices.”
THIS ECONOMIST THINKS 2019 AND 2020 “will be a good time to be bullish on hard and financial assets,” because “the Fed caved, and I think Donald Trump had as much to do with it directly as indirectly.” And, right on cue, Trump blasted Chairman Jay Powell yesterday for his 2018 rate hikes, which the president said curbed GDP growth. If our economist friend is correct, Jay Powell won’t be making that mistake again.
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