The Fed and Congress Remain in the Dark About the Economy
President Trump’s nominee to head the Federal Reserve System, Jerome Powell, faced his Senate confirmation hearing this week in front of the Senate Banking Committee. Anyone who had been hoping that a Powell chairmanship would differ in any way from that of Chairman Yellen would have been sorely disappointed after watching the hearing.
Having already served on the Fed’s Board of Governors for five years, Powell is a staunch defender of the institution he serves. The beginning of his testimony was a reiteration of the same pablum we have heard from the Fed for years. Just reading the text, you would be hard pressed to distinguish it from anything Yellen, Bernanke, Greenspan, or any Fed Governor had ever uttered over the past several decades.
Perhaps most disappointing about Powell’s testimony was his assertion that the economy is stronger and more resilient now than it was ten years ago. Anyone who has been watching markets over the past decade can see that the massive growth in stock valuations is just the predictable consequence of years of unconventional and highly accommodative monetary policy. The trillions of dollars that the Fed and other central banks flooded into the financial system are finally making their way into stock markets.
But to hear it from the Fed, the economy is doing great. Unemployment is low and stock markets are booming, so what is there to fear? There’s no mention of continuing slow GDP growth, slow wage growth, and higher prices for food and housing. In fact, according to the Fed, inflation is still too low. If anything, the Fed would like to blow the bubble even bigger. But you won’t hear any talk of a bubble cross the Fed’s lips, or Congress’s for that matter either.
In fact, the only real mention of a bubble at Powell’s hearing was in reference to Bitcoin and cryptocurrencies. Is there perhaps some unwarranted euphoria in cryptocurrency markets? Maybe, but that is just some of the same euphoria from stock markets brushing off onto cryptocurrencies. When stock markets shoot through the roof the way they have, millions of investors get swept into the frenzy, each of them thinking that this time is different, that this is finally the permaboom that they have always hoped for.
The reality of easy money-fueled booms, however, is that they inevitably end in a bust. This one will end the same way, and when it does there will be much soul-searching in Washington and questioning about why “we” didn’t see this coming. Anyone with an understanding of economics and a willingness to open their eyes can see this crash coming from a mile away. But Congress and the Fed remain willingly clueless, and millions of investors who won’t take the necessary steps to crash-proof their investments will suffer the consequences.