Which came first, this week’s volatility in equities markets, or volatility in the minds of people who think government has the duty and competence to fine-tune those markets? Whatever the answer, the more pressing question is: How high will be the cost of interest rates, having been too low for too long? Events might be teaching a tutorial on the steep price of cheap money. Call this Thomas Hoenig’s vindication.
Such money has been intermittent for decades: The real (inflation-adjusted) federal funds rate was negative about 40 percent of the time in the 1970s and in the first decade of this century. One purpose of the low rates was to send a flood of money into the increasingly frothy stock market in search of higher returns. This would, the thinking was, produce a “wealth effect,” making a fortunate minority feel even more flush, and more inclined to increase its consuming and investing, with benefits for all.
For 20 years, from 1991 to 2011, Hoenig, an Iowa native, was president of the Federal Reserve Bank of Kansas City, in which role he said: Interest rates are the prices of money, so, “Tell me one product, one service, that trades well at a price of zero.” By “trades well” he meant “is put to efficient use.”
Today, Hoenig, who is now with George Mason University’s Mercatus Center, notes this: The Fed’s balance sheet of government and government-guaranteed assets, by which it nudges down interest rates, grew from $900 billion in 2007 to nearly $9 trillion in March 2022. Since 2010, after the Great Recession of 2008, whenever the Fed has tried to “normalize its balance sheet and interest rates, the market has become unstable.”
Last week’s events, Hoenig suggests, “began last fall” when the Fed “signaled” that rates “would soon be lowered,” a signal it has repeated. “It slowed its planned reduction of its balance sheet, which remains above $7 trillion.” The question now, Hoenig says, is will the Fed properly allow rates to come down only as inflation falls to the Fed’s 2 percent target, or will it aggressively try to fend off unwanted, but necessary, corrections — necessary for “better long-run outcomes?”
A disappointing report, on the previous Friday, on just one month of hiring seems to have triggered Monday’s stock sell-off. This ignited worried chatter about whether the Fed should have cut rates the week before, or might have to do so as an “emergency” measure before its scheduled meeting next month. This is not what panicky markets need: yet another government entity declaring yet another emergency to justify violating a prudential maxim: “Don’t just do something, stand there.”
In election years, or in years before such (these are the only kinds of years there are), the Fed is in an awkward position of its own making. In 2010, Fed Chair Ben Bernanke spoke of the Fed’s tasks of “economic management” and “economic engineering.” Fed chairs before and since have seemed to embrace similar thinking. Bernanke, said Hoenig at the time, was speaking “the language of a central planner.” Such planning is a political project — attempting to shape society’s allocation of wealth and opportunity. Such talk guarantees that any action the Fed takes, or does not take, will be skeptically examined for political motives or impacts.
Last year, the government went into a swivet when the nation’s 17th-largest bank, Silicon Valley Bank, made some bad bets on interest rates and faced possible failure. So, what is not “too big to fail”? Perhaps the biggest “systemic risk” is the propensity to discern such risk hither and yon.
Accurately reporting the over-caffeinated response in financial and other circles to Monday’s market events, the lead story in Tuesday’s Post began: “U.S. stock markets fell sharply Monday, with two major indexes racking up their worst day of trading in almost two years.” So, to find a comparable earthquake we must peer through the mists of history all the way back to … 2022.
A year before this week’s market blip, on the first Monday of August 2023, the Dow Jones Industrial Average closed at 35,473.13. This was 3,230 points (8.3 percent) below last Monday’s close of 38,703.27.
When experiencing unsettling turbulence, some people pray, “Hail Mary, full of grace,” etc. When markets have erratic episodes, Americans should say to themselves (and their government), “Markets go up, markets go down, get over it.”
