One of the really strange things about watching Federal Reserve policy is the overabundance of deference to the Fed’s judgment.
While the Fed deserves credit for when it gets things right – eg, rescuing the credit system from the Great Financial Crisis (GFC) – it deserves far more blame for the sins it commits.
I am not a Fed hater or part of the crew that wants to “end the Fed”. Often, criticism of the Fed makes thinly-veiled excuses for the underperformance of alpha chasers. “If only the Fed hadn’t done X, our portfolios would have been much better” sounds like a terrible approach to wealth management for clients.
Still, as the Fed Funds chart above shows, there’s a lot to criticize if you want to criticize America’s central bank:
– They were a major factor (among many) contributing to the GFC;
– Their prognosis is dire (to be fair, so is everyone else’s);
– They hold fundamental beliefs that are misguided or wrong. (wealth effects, inflation expectations, etc.)
We can save more criticism of how the Fed might improve for a future date, but for today let’s just focus on the FOMC’s interest rate policy.
Just consider the mistakes of the past few years and you’ll see that the biggest mistake they seem to have made is either arriving too late to the party or overstaying their welcome once they’re there.
2000s: Rates have been kept very low for too long after 9/11 and the dotcom implosion – the FOMC didn’t get rates above 1% until 2004.
2010: Remained in GFC on emergency basis for too long – rate left at 0 until December 2015.
2020: Despite broad evidence of economic recovery post-Covid remains on an urgent basis. After that March 2020 rate cut, the Fed stayed at zero until March 2022. During the same period, the S&P 500 rose 67.9% (2020) and 28.7% (2021).1
In short, the Fed was slow to recognize the impact of their ultra-low rates after 9/11; After the 2008-09 crisis, they kept rates at zero until 2015, post-Covid, they kept rates at zero despite inflation and market signals. Despite countless signs that we have passed peak inflation, the FOMC has again been slow to recognize it.
Once again, the FOMC is the party guest who arrived late, and now, is overstaying its welcome.
in the past:
Goodbye, TINA (September 28, 2022)
Blame the Fed for everything! (June 9, 2022)
Normalization vs Inflation (March 14, 2022)
How Greenspan Became Ex-Maestro (August 11, 2014)
Who’s to Blame, 1-25 (June 29, 2009)
1. For the full calendar year 2020, the total return of the S&P 50 index was 18.4%; 67.9% return since March 23, 2020