Authored by Eric Peters, CIO of One River Asset Management
“We’re not even thinking about thinking of raising rates,” declared America’s Fed Chairman, all but eliminating uncertainty about the Fed policy path through 2022. The S&P 500 had completed a historic recovery from the pandemic lows to trade higher on the year, its price utterly disconnected from today’s economic devastation.
But markets never discount today, they discount tomorrow. And no sooner had they taken a little peek at what prices looked like back on January 1st then they began to plunge.
Some blamed signs of a viral resurgence, though that had swirled for days. Others blamed Millennials whose day-trading resembles the dot.com mania. And a few blamed General Milley, America’s top-ranking general, who apologized for joining the President on his ill-fated march to St. John’s Church. You see, the generals have turned their backs on Trump over his response to demonstrators. The NFL has too; its commissioner apologized for having opposed taking a knee. Even NASCAR banned the Confederate Flag. And as Trump’s re-election prospects tanked, expectations for a dramatic restructuring of America’s economy soared.
Efforts to rebalance the division of profits between capital and labor is demanded by a riotous Main Street. But this terrifies Wall Street, which has worked for years with Republicans, Democrats, CEOs and the Fed to extract an ever-increasing share of national prosperity for those who control capital.
This imbalance is central to today’s tumult. “If we held back because we think asset prices are too high - what would happen to those people who we are legally supposed to be serving?” asked Powell rhetorically, unsuccessfully defending himself from a rising chorus of critics who see the Federal Reserve as amplifying inequality.
For decades, the central bank accommodated the financialization of the world’s largest economy.
Now that the process is largely complete, even a modest market wobble threatens to devastate the real economy. And Powell is now helpless, caught in a trap of the Fed’s making.