Analysis and Opinion »

Time For the Federal Reserve to Pivot

Bob Lang
Share on StockTwits
Published on

Since the global financial crisis of 2008, the Federal Reserve has done its best to shore up confidence. Each time it appeared we were suffering from a crisis of confidence, the Fed was there to reinforce their actions and commitment to help the economy heal. They put unprecedented policies and measures in place to do just that, but at some point, the Fed will have to let go.

We are once again at the point where it seems the economy and stock market are ready to throw a fit – and they are waiting for the Fed to respond and ensure everyone that everything will be fine. Like Pavlov’s dog, the economy has been trained – and they are waiting for their treat.

I’m going to say it now:

The Fed needs to look the other way and IGNORE the shouting from those who insist they need backing. The time is right to pivot away from a generous accommodative monetary policy – the economy is strengthening, job growth is robust, and corporate profits are solid. This is the best time to start unwinding their unprecedented accommodations for the US economy and prepare the markets for a more normalized Fed policy.

Many talking heads have an opinion about the efficacy of the Fed’s aggressive policy, especially around the length and depth of it. Frankly, I’m so relieved we have only one Federal Reserve committee and that they do not listen to the commentary in the media. But now it’s time for a real economic cycle to be re-established, and that can only be done when Fed policy is normal. It’ll take years to get there (2018 at the earliest), and it’ll be a very slow and gradual pace (unless inflation picks up).

The confidence instilled by the Fed’s extreme policy has allowed investors to turn away from the disastrous cliff they were all ready to jump over in 2008. The Fed basically established a barrier along that cliff. However, it is not too soon to start indicating that the barrier will be dismantled. To be sure, the economic and stock market gains are all due to the Fed’s policies, and they will not give those up easily.

Like in life, there is no perfect timing here. However, the masses have been very concerned that the Fed may never decouple from the support – often referred to as “QE forever.” This is a logical assumption, as the Fed never set a timeline for when the accommodation would be removed or reduced. The latest QE was slowly pulled back over an entire calendar year. That differed from the end of the prior QE, when the support was pulled abruptly (but not without telling us), and volatility spikes began occurring with regularity.

Consumer confidence is at all-time highs, the stock market is a stone’s throw away from record highs, interest rates are near record lows, and inflation is nascent. Furthermore, other central banks have taken steps to combat a potentially dangerous deflationary threat: In January, thirteen central banks cut interest rates – an unprecedented move.

The cries for help from the Fed at this point are just pleas from a greedy investing/trading public. From a rational standpoint, it makes sense for the Fed to get back on track to a more normalized monetary policy. Yet many have questioned their credibility, even though they have been very transparent with policy direction. Their goal all along has been to do whatever it takes for however long to get the economy back to functioning normally. We are nearly at the point of their dual mandate – price stability and full employment – so now is the time to show once again that they have credibility.

Share on StockTwits

Iron FX 1.11156/1.11128 2.8
XM Markets 1.09948/1.09928 2
FxPro 1.10184/1.10171 1.3
FXCM 1.13943/1.13912 3.1