Patience is a virtue. Fed Chief Jay Powell decided today to embrace patience and the stock market roared. All day long I have had to listen to critics opine that Powell is going against his doctrine or caving to the critics or bowing to the stock market to move it up.
These views are ill-informed at best and disingenuous at worst. Powell opted to exercise patience and see what happens with the economy because he had caused a level of fear and paralysis that almost brought the credit and equity markets to a standstill. He had become a one-man wrecking crew and the doctrinaire and the uninformed insisted that he needed to do either because they wanted rates to be high so he could cut rates if things weakened or because they wanted consistency. The man said there would be four rate hikes back in October because he is smart and knows all. But it turns out he, himself, slowed the economy down and we got what amounted to nothing more than a flash crash right before Christmas.
Look, I know I was relentless about his need to change his view. I wasn't all that restrained about it because I didn't want a "they know nothing " moment where I urged the Fed back in 2007 to stop tightening and to recognize how they were crushing the economy and they all laughed at me as if I were Carrie covered with pig blood dumped on me by John Travolta.
Now, like then, I chose not to rely on the Fed data opting for them to do more homework and make more calls to see what was occurring because they were going to end the economic expansion, which would be a terrible thing.
The truth is that the Fed was really only looking at employment growth and thinking that's all that mattered. They did not care about the cross-currents ike the slowing growth in China, Brexit and slowing growth from the government shutdown. There was a need for caution, as Powell said in the press conference, that it was time for some common sense to be sure that these issues don't derail the U.S. economy if done simultaneously with raising rates. Powell said he wanted to be "patient" and adopt a "wait and see approach" especially given low inflation.
The case for raising rates, as Powell, said, has weakened because of a downturn in the economy that the Fed didn't see when it made its imprudent-rate hike projections.
Now I understand how hard it is to admit that you made a mistake. Powell could not say that he wanted to take back the "three more hikes" admonition on top of the December hike. No one's asking him to do that. All that matters is that like the late great economist John Maynard Keynes said: if the facts change you have to change, too, and the facts sure changed.
Now I know that many will says that Powell should not go against his earlier view and is bending to those, like me, who want higher stock prices. I hate this talk. I don't want higher stock prices. I want the economic expansion to continue because I want MAIN STREET to do better and the Fed's lockstep rate autopilot plan in the face of a slowing economy seemed most unfortunate. It was Main Street, not Wall Street, that was at risk. The narrative of slowing global growth, as Powell said, is continuing and could get worse, despite what you may hear from Boeing (BA) today or United Technologies (UTX) last week.
Again, I was and am advocating both a prudent and rational view and Powell's earlier stance, now repudiated by himself today, would have most certainly ended the economic cycle. I must have spoken to a hundred CEOs, all of whom agreed with me except ONE who recognized that Powell wanted the economic cycle to end in order to stem largely non-existent inflation. Most said if he would just be patient he would realize that he has already slowed the economy to a level that while not bringing down wages certainly slowed down economic activity.
Let's go over what Powell saw to change his mind:
1. Almost every other country in the world is seeing a downturn that is steepening and he couldn't ignore it any longer.
2. The dollar was getting so strong because of these rate hikes that we were losing our competitive advantage.
3. Retail, which had been going great guns slowed dramatically after Black Friday and the only correlative was Powell's now admitted imprudent comments about hikes. The deceleration was incredibly stark.
4. Lots of what looked like strong activity was pull-through by our companies and Chinese companies to beat the tariffs and who knows how that will play out.
5. Housing took a big hit down when mortgage rates went up. Housing is 10% of the economy but as I have said over and over again, it punches above its weight and truly weighed on the economy.
6. We saw a definitive downturn in many of the building blocks of the economy, the basic chemicals and liner board, always early indicators of a slowdown.
7. The price of oil plummeted some of which was increased supply but most of it was a slowing global economy.
8. The government shutdown exacerbated the decline in the economy and that could easily come back without a wall agreement.
9. Travel and leisure slowed dramatically as we heard from the airlines and the hoteliers.
10. Autos just can't get momentum and some of it was directly related to loan rates which have been hiked because of the Fed.
Now against all of this was the increase in hiring and the tightness of the labor market. It is harder to find good employees. You do have to pay more to get them. But when you see 200,000 people being hired every month with small increases relative to what the big bosses make, don't you have to conclude that we have underestimated the pool of workers that were available.
Yes, it's terrific that stock prices went up after Powell spoke. But that's NOT the point. Powell choice patience because it's better than choosing haste. He opted for prudence over recklessness.
Only in a world where there are so many Fed watchers who didn't watch the real economy and didn't spend countless hours speaking to executives would Powell's view being interpreted as caving. That's nonsense. These people are criticizing me now the way I was criticized in 2007 when then, too, I heard that I was all about stock prices and not a potential economic crisis or catastrophe. which is what we got.
Powell didn't want to be the person to end the business cycle. He didn't want to be the reason why we went back into a recession like the Fed did in 1937 when the economy was "saved" by World War 11.
We salute Chairman Powell for not wanting to hurt Main Street, for not wanting to throw people out of work needlessly and not wanting to crush the housing, auto and industrial industries.
Now part of prudence is recognizing that if the economy heats up, instead of slackening as it was, Jay can come right back and tighten. If it is needed he will do it.
But what matters to me is that he listened. I screamed and screamed in 2007 that Main Street was about to be crushed. I totally failed. This time, we headed off a downturn we stopped the end of cycle talk. What a win for the American people. Thanks Jay for getting it right, for embracing common sense, pragmatism and prudence and avoiding recklessness, rashness and dogmatic behavior.
You could not have done a better job for the American people.