FED Says Signs are Good

This is the first full week of the Trump administration and, unless you are employed in Washington, things are likely the same for you as they were last week. I know, it feels different, and I also know that for a great number of you the change is scary. Many of our readers are happy about the change, and many are distraught. So, the timing seems right to look at a perspective from an institution just as created by the Federal Government to be purposefully neutral: The Federal Reserve.

Several Wealth Managers from our team recently attended an economic forecast by the Federal Reserve. Alison Felix, an economist and branch executive at the Federal Reserve Denver Branch, describes a positive economic outlook for the USA, and in particular, for Colorado. The economy is stabilizing and recovering. Colorado is even stronger than the nation, with net migration positive and unemployment very close to full employment: 4.7% nationally, 3.2% in Colorado. The Fed expects a national growth rate of 2% but, in Colorado, we are growing much faster. Nationally, we've had payroll growth of 5.9% but in Colorado, payrolls have grown by 14.2% and in Denver, an 18.7% increase! Homes in Colorado are 160% as expensive as their prior peak in 2006. For point of comparison, the rest of the US just passed this prior peak last year and only by 6% (1). The Fed plans to raise by 0.75% Fed Funds rate in 2017.

Interestingly, in the Q&A, we learned a little of her opinion that may be different than the Trump administration or the Democrats in Washington. Famously, both sides agree on infrastructure spending--and little else. But Ms. Felix's opinion is that type of spending requires labor--and we are at full employment--and commodities--which are already in short supply. It might not be necessary, or impactful, and that gave me hope because it reaffirmed my (weakening) faith in the independence of the Federal Reserve. At minimum, her opinion confirms my confidence in free speech.

In the past, I've commented at great length about the purpose of the Fed: to keep inflation at a reasonable (2% annual) rate and to maximize employment (lower unemployment). The tools of the Fed, when I was in school, amounted to setting the Fed Funds Rate and adjusting the amount of Federal debt it keeps on the books. Since the credit crisis of 2008, we've learned that there are many more tools in the belt than that, each with a greater, or lesser, impact on the economy.

In the past, many of us have questioned the Fed's impartiality. We've looked at the history of the Fed, and under Reagan, found the then Fed Chief, Paul Volcker, to be contentious--clearly at odds with the administration. Recently, many people put a large portion of the blame for the credit crisis on the Greenspan/Bernanke era of the Federal Reserve. Others give them credit for their creativity.

In the very recent past, I wrote that the market controls interest rates, not the Fed. Indeed, under Yellen, at the end of 2016, rates rose by three times the amount of the actual Fed interest rate increase, weeks before the Fed took action. And under all three of the Fed Chairs above, we can see evidence of this happening. Most fascinating to me, because it is now 40 years ago, the Volcker administration lowered rates and rates went up. When Volcker first fought inflation, inflation got worse. The market, not the Fed, rules the roost.

"May you live in interesting times" is a curse, from one perspective, and a blessing from another. Indeed, this year is interesting!

1) Felix, Alison Economist & Branch Executive Federal Reserve Bank of Kansas City Denver Branch, Emerging Trends in U.S. & Colorado Economies, January 20, 2017

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