Tahoe-Truckee Market Beat: Taking away the punch bowl
According to William McChesney Martin, the job of the Federal Reserve is, “to take away the punch bowl just as the party gets going.”
Bill Martin served as Chairman of the Federal Reserve Bank for almost twenty years under five different presidents, from 1951 to 1970. Coincidentally, he got his start in the industry at the same firm that I did, A.G. Edwards and Sons, where he went on to become a full partner. I left the firm before it got bought out by a large bank to become an independent fee based adviser.
What he meant by that quote had nothing to do with partying or alcohol consumption. He meant that the Fed should start raising interest rates just as the economy is growing, before it overheats and we have excessive inflation.
The current Fed chair, Janet Yellen, gave a speech in Chicago last week and indicated that the Fed would likely raise rates at its next meeting. The next meeting is scheduled for March 14-15.
At the speech, she said, “Indeed, at our meeting later this month, the committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would be appropriate.”
The Fed will have six more meetings this year, after the March meeting and most forecasters expect two or three rate increases this year.
Yellen has indicated that she will serve out her full term, which ends in January 2018. President Trump has criticized her in the past and will likely get the chance to nominate the next Fed chair, but it is unlikely that she will step down early.
We’ll probably see some new members of the Fed, maybe as many as five by the time Yellen’s term is over with, so President Trump will have some influence on the makeup of the board.
The Fed has a couple of mandates, one of which is full employment. The other is to fight inflation. They do want to see some inflation; they have a target inflation rate of 2% annually.
If the CPI or consumer price index is running above their 2% target rate increases are very likely. Currently the labor market has been fairly strong and it looks like some gradual interest rate increases should be expected.
A return to normal interest rates will be good for conservative investors and savers.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.