When the growth is fake but the stock market is real

Image Source: https://pixabay.com/photos/stock-exchange-trading-floor-738671/

Since the financial crisis in 2008 where a liquidity crisis among the worlds major banks threatened the global economy, central banks around the world, led by the United States Federal Reserve board introduced quantitative easing in conjunction with near zero interest rates. In addition to this extraordinary measure the Federal Reserve absorbed some of the bad debt and consolidated the illiquid assets. Fast forward 10 years and we have a stock market reaching near all time highs, and by all counts an economy thats humming along. Albeit the rate growth has slowed over the last year, a contraction is not a near term risk, at least for North America.

The Federal Reserve was designed to be as independent from politics as possible where their key focus is to take action on data. Of late the president of the United States and his cohort of wannabe economists have begun calling for a decrease in interest rates, blaming the federal reserve for the recent 20% decline in stocks that occured in december of 2018. However, the stock market has seen an equal and opposite reaction, recovering from the correction in just a few months time.

Some key factors to keep in mind:

The Stock Market is not the economy

The Federal Reserve is supposed to be independent

Jerome Powell is known to be level headed and measured in his approach

Donald Trump is not an economist, but he's been bankrupt many times

Larry Kudlow is a talking head for CNBC, not an economist

By reducing the balance sheet and increasing interest rate, the Fed has policy tools should future headwinds manifest in the domestic or global economy

Most recently the President of the United States has boldly claimed that were it not for the policy action taken by the Federal Reserve over the last year and specifically in December 2018, the US would have seen 4-5% GDP growth and the stock market would be 10,000 points higher. Recently, former Federal Reserve Chair, Alan Greenspan spoke at an event where it was acknowledged, that yes inflation in stocks does translate to GDP growth, he cautioned that this would be fleeting at best.

In addition to meddling with something the president just simply doesn't understand, other Central Bank leaders have begun sounding alarms, with Mario Draghi raising concern for the Federal Reserves independence. This sentiment echoed the reason senate committee hearing with the US's biggest bank CEO's testifying before congress. The question posed the them was whether the Federal Reserve should be independent of politics and whether the US should return to the gold standard. Unsurprisingly the answer was a resounding 'yes' to Federal Reserve independence from politics and a hard 'no' to returning to the Gold Standard.

What do you think about political meddling in monetary policy? Let me know in the comments!