Heading on a collision course with recession, 65-year-old Federal Reserve Board Chairman Jerome Powell learned little from former Chairwoman Janet Yellen. Since taking over the Fed. Feb. 5, 2018, Powell has raised the Federal Funds rate three times to 2.25%, not high by historic standards but high by Yellen’s standards, who kept rates low until leaving office. Yellen inherited the chair from Princeton University economist Fed Chairman Ben Bernanke, who kept the U.S. economy from plunging into another Great Depression. Bernanke inherited the Fed from Alan Greenspan, presiding over a stable economy until the financial melted down in 2007, watching some of the biggest U.S. bankruptcies since the 1929 stock market crash and Great Depression. Bernanke was determined to keep the economy from plunging into the next Great Depression, slashing interest rates to zero percent Dec. 16, 2008.
With zero-to-a-quarter-percent federal funds rate, Bernanke’s Fed did his part with monetary policy to provide as much stimulus to the economy as possible When the Dow Jones Industrial Average hit rock bottom March 6, 2009 at 6,443, it had fallen 7,755 points or 55% from its record high of 14,198 on Oct. 11, 2007. When the stock market goes into extreme bear territory, it spells recession for the U.S. economy. Watching Wall Street move sideways over the last month should send a loud signal to Powell that he’s playing with fire. Watching the second quarter growth hit nearly 4%, Power jumped on the anti-inflation, interest rate hike bandwagon, hoping to slow down inflation. But coming out of recession in 2010, the economy didn’t need the kind of tightening that’s left Wall Street reeling. Powell read the wrong tealeaves when the Fed’s metrics showed that inflation was getting out of control
Wall Street strategist Jim Paulsen warned about the Fed’s overly zealous interest rate hikes. “The next show to drop, I really think is the U.S. economy slows, may in half to around 2% growth,” Paulson told CNBC’s “Squawk Box.” “That might force Wall Street to lower 2019 [earnings] estimates, maybe to flat line,” meaning that the economy could stop growing or actually shrink next year. Paulsen admitted that today’s correction could be too enticing for value investors fishing for bargains in the market. Yet the line between bargain hunting and when the bottom falls out like it did March 6, 2009, isn’t that clear. Too much tightening by Powell could send Wall Street’s bargain hunters heading to the exits with cash. Billionaire 77-year-old real estate investor Sam Zell showed signs selling off investments or going into cash, sitting on the sidelines until markets stabilize.
Snapping up hammered down financials like JPMorgan-Chase [JPM], billionaire 88-year-old investor Warren Buffett, Chairman of Berkshire Hathaway, continues dollar-cost-average, buying on dips. Still a big Wells Fargo investor with 442 million shares, Buffet now holds 35.6 millions shares of JPMorgan. Snapping up shares of Bank of America and Goldman Sachs, Buffett bets there’s still legs left on today’s bull market, regardless of Powell’s current moves to hike rates. Buffett added 198 million shares to his BofA holdings, bringing his total to 877 million shares, the company’s No. 2 investor. Just as easily as Buffett buys financials, he could just as easily sell them off when they’ve snapped back to higher value. Small investors shouldn’t follow Buffett’s lead because they don’t know when he’ll have a change-of-heart and starting selling. Following big investors, like Buffett, can be dangerous..
Paulsen’s’s warning about Powell’s zealous rate hikes should be taken seriously by anyone who knows that at today’s close of 25,080, the Dow Jones Industrial Average could plunge to new lows, without a bottom in sight. If institutional investors get wind that the market has no bottom, short sellers will start driving the markets to new lows, signaling a bear market. “I didn’t see that yet. We’re still growing to fast here,” said Paluson, referring to the third quarter 3.5% GDP growth. “When we do find a bottom, we’re going to feel a lot more fearful about a recession around the corner,” Paulsen said. Paulsen fears that Powell could throw cold water on the economy, driving GDP growth back on one percent or less. It’s not the bottom that investors’ fear: It’s the lack of a bottom where things could keep falling with no bottom in sight. No body knows yet when that will happen.
Trump warned Powell not to keep hiking the federal funds rate or potentially risk plunging the economy into recession. Like other appointments, Powell serves at the pleasure of the president and could be let go if his Fed stewardship gets called into question. Fed inflation hawks need to balance the real risks of recession in 2019 and stop hiking the federal funds rate. Crashing the Dow, Nasdaq and S&P 500 would no doubt plunge the economy into recession or zero growth in 2019. Already in correction territory, the tech-rich Nasdaq doesn’t need more rate hikes from Powell. Whatever today’s record unemployment rate, it could all change on a dime. Once corporations brace for recession or zero growth, they’ll stop hiring and begin firing new hires. To assure steady growth in 2019, Powell needs to stop hiking rates, reassure investors and let Wall Street work its magic on the U.S. economy.
