Trump Wants the Fed to ‘Feel the Market.’ That’s Pretty Good Advice, Actually.

Back in the summer and fall of 2007, for example, global credit markets were becoming strained, bond yields fell and stock prices began gyrating wildly. What would eventually be known as the Great Recession began in December of that year.

In 2015 and early 2016, a strengthening dollar, plunging commodity prices and slowing global economy caused similar turbulence in markets — and though a full-scale recession was averted, there was a mini-recession, depressing economic activity in large parts of the United States.

In both those cases, the Fed was wise to adjust its policy in response to what markets were doing (and with hindsight did so too slowly and reluctantly). But the flip side of that is that sometimes markets move for reasons that don’t really tell us anything about the economy.

There’s an old joke that the stock market has predicted nine of the last five recessions. In the last decade that has been more like nine of the last zero recessions.

Remember the great sell-off of late January and early February of 2018? It resulted in a drop of about 9 percent in Standard Poor’s 500 index — yet 2018 has turned out to be the strongest year of economic growth in a long time, even as the Fed maintained a steady course of gradual rate increases.

When the Fed has too itchy a trigger finger in trying to protect the economy against market gyrations, it can have negative consequences. In 1998, the Fed cut interest rates amid crises in emerging market nations. The economy roared ahead in 1999, fueling a dot-com bubble that would subsequently pop with damaging consequences.

As the Fed chairman, Jerome Powell, and his colleagues gather around the big table to make their decision, it really does boil down to whether this is just a market disruption that needs to be allowed to run its course, or the early stages of something that will damage the ability of ordinary Americans to earn a good living.

Article source: https://www.nytimes.com/2018/12/18/upshot/trump-federal-reserve-feel-the-market.html?partner=rss&emc=rss