Jerome Powell Crosses the Rubicon


by Jim Rickards, Daily Reckoning:

Mr. Jerome Powell entered this day hung from the hooks of a mighty dilemma.

Should he deliver another rate hike… or hold steady?

In two opposite directions he was yanked plenty hard…

His inner lights, his inner mother-in-law, urged him to hike.

GDP expanded an average 3.85% the two most recent quarters, they reminded him.

Unemployment — at 3.7% — plumbs depths unseen in a half-century. Wages are on the upswing.

Loading the scales in favor of a hike was the eager American consumer.

November retail sales jumped 0.9% — a Reuters poll of economists had forecast only 0.4%.

In all, an accelerating economy justifying a foot on the brake.

Bloomberg in summary:

“These conditions speak of an economy at full capacity and don’t square with the current benchmark interest rate of just 2.25%.”

Bank of America CIO Michael Hartnett took the business one further.

Should Powell not hike today, he counseled, a stock market rout would ensue.

“What does the Fed know?” would be the market’s response.

A recession would be the answer.

Thus, Hartnett feared a nay would “prompt U.S. stocks to join the global bear market.”

There, in a walnut shell, the aggregated case for a rate hike today.

But from the opposite direction, Wall Street — and the president — pulled Powell violently.

The stock market rests precariously upon a teeter-totter as things stand. Another rate hike may tip it right over, they warn.

And another rate hike could take the oomph out of the economy.

There is justice in their argument…

The Dow Jones has lost some 3,000 points since early October. The S&P and Nasdaq have been similarly trounced.

And half the S&P trades in bear market country.

Are these conditions that warrant a rate hike?

No, says Bloomberg — not if history is a guide:

It’s exceedingly rare the Federal Reserve raises interest rates when stocks are behaving this badly.

In fact, were policymakers to follow through with their widely expected hike Wednesday, it would be the first time since 1994 they tightened in this brutal a market. Right now the S&P 500 is down over the last three, six and 12 months, a backdrop that has accompanied just two of 76 rate increases since 1980.

And the United States economy?

GDP has been expanding, yes — but the trend is down: 4.2% for the second quarter, 3.5% for the third and fourth-quarter GDP estimates come in at roughly 2.4%.

And most 2019 projections range between 2–2.7%.

Meantime, first-quarter business investment expanded at a roaring 11.5% clip. By the third quarter… it was reduced to a sickly 2.5%.

Furthermore, the credit markets have ground to a standstill… like a seizing engine.

And where — exactly — is inflation? asks the anti-rate hike crowd. The Federal Reserve cannot even swing a lowly 2%, they moan.

And it wants to hike rates?

Atop it all the global economy has caught a flu — a contagious flu.

Explains renowned hedge fund manager Stanley Druckenmiller in TheWall Street Journal:

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