Weekly Update 6/21/2019 Is the Fed Policy Misguided?

Weekly Update 6/21/2019 Is the Fed Policy Misguided?

by Zach Marsh on Jul 12, 2019

Weekly Update: Is the Fed Policy Misguided?

This week the Federal Reserve Open Market Committee concluded its monthly meeting and, in its statement, set the stage for an interest rate cut at its next meeting in July.  While many financial news prognosticators and market cheerleaders are encouraging the cuts, the timing and necessity for them is anything but certain. 

By most measurements, the economy seems to be doing pretty well.  Unemployment is still at rock bottom levels, GDP numbers are encouraging, yet wage growth remains underwhelming.  The one thing that continues to confound central bankers is the lingering low inflation rate.  While briefly eclipsing 2% last year, inflation has fallen back below the Fed’s target level.  Since the “Great Recession” the Fed has been doing everything in its power to push the inflation rate back to 2%.  Quantitative Easing’s main purpose was to prevent the deflationary trap that has hampered Japan for nearly 30 years. 

That being said, last year’s systematic rate hiking strategy appeared a bit aggressive.  Many, at the time, believed that the Fed could allow the economy/inflation rate to burn a little hotter, thus giving it some breathing room above the target rate.  However, the Fed pushed forward with the rate hikes and, at the start of this year, it found the stock market down nearly 20% from its highs, while threats of trade wars threatened global growth.  Now, 6 months later, they are set to reverse course.

Today, as the debate over the timing and necessity of the cuts heats up, maybe we should step back and ask some more basic questions.  After more than 10 years of aggressive monetary policy, are we certain that the Fed has or has not achieved its goal to re-inflate the US economy?  Is the standard measurement of inflation used by the Federal Reserve even a pertinent metric?  Finally, does the Fed possess the tools necessary to address the inflation as they measure it?

The Fed’s general measurement of inflation is the Core Personal Consumption Expenditure Index (PCEPI).  This index includes categories like Food, Housing, Apparel, Medical care, Transportation, Education, Recreation, plus other goods and services.  Looking over the categories, it’s hard to accept that there hasn’t been some inflationary pressures.  Who among us believes that housing, education and medical costs have not increased pretty dramatically over the last couple years, let alone over the last 15-20 years?

Second, outside the categories listed in the index, one thing that the easy monetary policies of the last 10 years has accomplished quite effectively is aggressive inflating of nearly all asset classes.  Bonds, stocks, and housing have all staged remarkable recoveries.  Stocks are up over 340% since the end of 2008, while the interest rate on the 10 year US Treasury bond has actually declined 20%.  Even housing prices, as measured by the S&P Case-Shiller Home Price Index, are above the hyper-inflated 2006 levels.  From an asset valuation perspective it’s tough to make the argument that we are not in an exaggerated inflationary environment. 

Which brings us to the ultimate question which is:  Aside from achieving asset price inflation, can the Fed actually achieve the goals of pushing the prices of other goods and services higher, by means of pushing wages higher, thus creating actual demand necessary for upward price movement?  The answer to that question is extremely difficult to ascertain.  After 10 years and little progress, it seems dubious to assume they can.  Many things, mostly demographic, are stunting global growth and general wage growth.  That being said, the Fed suffers from “A man with a hammer syndrome,” to the hammer everything is a nail.  The response of the economy, and the market, in the aftermath of the 2008 global meltdown to quantitative easing and low interest rates has provided the Fed with evidence they want to continue marching down this same path.  Unfortunately, these are also some of the same policies which have greatly expanded the divide between the haves and the have nots.  If we want to address those issues, perhaps we should stop relying upon the Federal Reserve Bank to solve all of our problems.

Thanks for reading,

Zach and Dave

Calibrate Wealth





All opinions are subject to change without notice. Neither the information provided nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. Past performance is no guarantee of future results.  Tax laws are complex and subject to change. Calibrate Wealth LLC, does not provide tax or legal advice and are not “fiduciaries” (under ERISA, the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Calibrate Wealth. Individuals are encouraged to consult their tax and legal advisors (a) before establishing a retirement plan or account, and (b) regarding any potential tax, ERISA and related consequences of any investments made under such plan or account.


This material does not provide individually tailored investment advice. It has been prepared without

regard to the individual financial circumstances and objectives of persons who receive it. The strategies

and/or investments discussed in this material may not be suitable for all investors. Calibrate Wealth

recommends that investors independently evaluate particular investments and

strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a

particular investment or strategy will depend on an investor’s individual circumstances and objectives.

Investing in commodities entails significant risks. Commodity prices may be affected by a variety of

factors at any time, including but not limited to, (i) changes in supply and demand relationships, (ii)

governmental programs and policies, (iii) national and international political and economic events, war

and terrorist events, (iv) changes in interest and exchange rates, (v) trading activities in commodities

and related contracts, (vi) pestilence, technological change and weather, and (vii) the price volatility of a commodity. In addition, the commodities markets are subject to temporary distortions or other

disruptions due to various factors, including lack of liquidity, participation of speculators and

government intervention.


Foreign currencies may have significant price movements, even within the same day, and any currency

held in an account may lose value against other currencies. Foreign currency exchanges depend on the

relative values of two different currencies and are therefore subject to the risk of fluctuations caused by

a variety of economic and political factors in each of the two relevant countries, as well as global

pressures. These risks include national debt levels, trade deficits and balance of payments, domestic and

foreign interest rates and inflation, global, regional or national political and economic events, monetary

policies of governments and possible government intervention in the currency markets, or other