There was a time when most Americans knew the name of the Chair of the “Board of Governors of the Federal Reserve System”, as it became known with the passage of the Banking Act of 1935. During the technology run-up in the late 90’s we were all enthralled by how Alan Greenspan dominated the news cycle with his cryptic way of speaking about monetary policy. And then the technology bubble burst, and our existential crisis began. Was it the Fed’s fault? Did the Fed do enough to prevent the crisis? Did the Fed interfere too much? Eventually the stock market came back but the questions lingered.
Ben Bernanke took over in early 2006, just as the risks were piling up in the mortgage-backed securities market. Those risks quickly exploded and we got the so-called Great Recession. Almost everyone learned who Bernanke was, as he led the Fed into some of its most controversial policy decisions that seemed to embrace an agenda far beyond any Congressional mandate. But the stock market recovered with lightning speed, and most of the people who were philosophically opposed to such a sweeping power grab were forced to grumble in silence. Janet Yellen steadied the ship for another four years after Bernanke’s eight years were up in 2014, and she avoided doing anything too controversial.
Today the job falls upon Jerome Powell, who first joined the Fed’s Board of Governors in 2012, after being nominated by President Obama in a bid to appease Republicans. Powell has a long history of achievement in academia, investment banking, and government. His net worth is reported to be well over $100 million and he is currently the wealthiest member of the Fed. He took over the Chair position in early 2018 after President Trump nominated him in late 2017. But ask any person on the street who currently runs the Fed and you might not hear his name.
That may be about to change. President Trump famously castigated Powell just a few months after his nomination to the Fed by saying he thought Powell was in favor of “cheap money”. Powell pushed back in numerous speeches over the next year before seemingly caving in to the pressure after the MSCI ACWI IMI Global Equity Index fell 13.28% in the final quarter of 2018.
So where does that leave us now? In the first quarter of 2019 the same global equity index rallied back 12.29%. Interest rate increases seem to be on hold, and now the White House is actively pushing for interest rates to be lowered by half a percent. President Trump has apparently chosen the next two members of the seven-member Board of Governors, and both have been characterized as being more political than academic.
If the Fed is indeed about to become more political, and less independent, is that a bad thing? If we have a President that actively cheers on “cheap money” and every rally in the stock market, is that a bad thing? History will decide, and perhaps fairly quickly. Maybe Jerome Powell will push back to assert the Fed’s independence, as seems to be his first instinct, and that might cost us all a lot of money. Most economists thought that the Fed was finally on course to withdraw its heavy hand from the markets. Perhaps, many thought, the markets can take care of themselves without government help. Or maybe Jerome Powell will go down in history as the Chair that gave in to political pressure, and that might make the job of the next Fed Chair nearly impossible.
Whatever happens in the next three years, one thing seems clear: the current price of the stock market seems to be strongly linked to Fed policy. In other words, the value of your stock market portfolio is in government hands. Should that make you feel good? Only time will tell.
Thanks for listening today. This is Eric Cramer, Chief Investment Officer at BIP Wealth saying goodbye for now, and I look forward to seeing you at one of our upcoming Quarterly Market Report lunches or on the webcast.
Disclosure: This communication contains general investing information that is not suitable for everyone and is subject to change without notice. Past performance is no guarantee of future results and there is no guarantee that any views and opinions expressed will come to pass. The information contained herein should not be construed as personalized investment advice, tax advice, or financial planning advice, and should not be considered a solicitation to buy or sell any security. Investing in the stock market and the bond market involves gains and losses and may not be suitable for all investors. The Global Equity index is the MSCI ACWI IMI Index, which is a free float-adjusted market capitalization weighted global index selected as the best available proxy for a diversified stock portfolio consistent with modern portfolio theory. Approximately 55% of the index is comprised of the U.S. stock market and 45% is comprised of international stock markets, including both developed and emerging countries. The “Net Total Return” version of the index is reported here, which means the index reinvests dividends after the deduction of withholding taxes, using a tax rate applicable to non‐resident institutional investors who do not benefit from double taxation treaties. The Emerging Market index is the MSCI Emerging Markets Gross Index. The U.S. Fixed Income index is the Bloomberg Barclays Capital U.S. Aggregate Bond Index, which is a broad-based benchmark selected as the best available proxy for a high quality, diversified fixed income portfolio suitable for a U.S. investor. It is comprised of the Barclays Capital U.S. Government/Credit Bond Index, the Mortgage-Backed Securities Indices, and the Asset-Backed Securities Index. It is an unmanaged market value-weighted performance benchmark for investment-grade fixed-rate debt issues, with maturities of at least one year, and an outstanding par value of at least $100 million. The “Total Return” version of the index is reported here, which means that dividends are included and reinvested. The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange (NYSE) and the NASDAQ. It is not possible to invest directly in this or any other index.