April 23, 2019

I don’t generally write much about the Federal Reserve here. I think that their role is overrated. Market pundits overreact to their every word. In general, I think they are doing a fairly decent job – much better than the desperate European Central Bank or the rudderless Bank of England or Bank of Japan, so I let sleeping dogs lie. Still, I object to the tyranny of the professoriate – the 220 PhD economists and their inevitable blind spots and corporate “group think” about the economic realities as taught in the academy.

To their credit, Jerome Powell’s Federal Reserve Board is listening to outside voices. Fed Vice Chair Richard Clarida recently gave a speech (April 9) about their scheduled “Fed Listens” series of events, culminating in a June 4-5 conference dedicated to exploring views of Fed outsiders on monetary policy.

Polite listening is one thing, but President Trump’s nomination of outsiders Stephen Moore and Herman Cain would provide a breath of fresh air to the Federal Reserve Board. Fifty years ago, a PhD Economist was not considered a requirement to be Chairman of the Board. – in fact, economists were in the minority.

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

In February 1949, the 11-man Federal Open Market Committee had only one PhD economist. Six had a law degree, two had a B.A. degree, and two had no college degree! After all, the key words in FOMC are “open market.” The board should have experience in markets more than academic theory. The first Fed chairman with an economics PhD was Arthur Burns in 1970, and he created a decade of “stagflation.”

Steven Moore has a Master of Arts in Economics from George Mason, while Herman Cain has a B.A. in Math and a Master of Science in Computer Science from Purdue. More importantly, Cain has a great deal of business experience and seven years at the Federal Reserve. Cain was chairman of the Kansas City Fed (Omaha branch), 1989-91, then deputy chair (1992-94) and chairman of the Kansas City Fed, 1994-96. I’ve had the pleasure of meeting both men on my New Orleans Investment Conference economic panels.

Herman Cain critiqued “The Professor Standard” at the Fed in a Wall Street Journal Op-Ed last week. He said this Professor Standard led the Fed “to pick up the pace of quantitative tightening and stick to its plan of rate hikes” last September, even as “commodity prices were falling, meaning the dollar’s commodity value was rising, a market signal of deflationary pressure.” Powell’s rate-raising “vendetta” in a slowing economy led to an unnecessary stock market bloodbath before the Fed wised up and stopped raising rates.

Cain favors creating dollar stability – not an overly strong or weak dollar, but a stable dollar – such as we sustained for long periods in 1947-70 and 1983-89, when GDP growth averaged nearly 4% per year.

Some Questions for the Fed (If They’re Listening)

Question #1: Why Does the Fed Set a Goal of 2% Inflation?  Why not Zero to 1%?

On April 9, the New York Times published an editorial entitled: “The Fed Is Courting Trouble,” in which the Times accused the Fed of allowing inflation to remain “persistently below the 2 percent annual rate the Fed regards as optimal.” Whoa, Nelly! Since when is low inflation a sign of failure, and why does the Fed seek 2% inflation as a goal? That delivers a doubling of prices about once per generation (35 years).

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This is failure? – According to the New York Times, it’s failure to achieve a 2% inflation target goal.

Low inflation or no inflation should be our goal, not 2%. Our period of greatest growth was the Industrial Revolution of the 1870s to 1914 – a time of slight deflation. So was the Roaring 1920s. We had price stability in the 20 years after World War II. By contrast, high inflation in the 1970s was a nightmare.

Question #2: Why Not Let the Market Set the Price of Borrowing (i.e., Interest Rates)?

Markets around the world are telling us the value of the U.S. dollar by bidding U.S. interest rates down or up. Currently, there is a global liquidity run into U.S. dollar assets, pushing Treasury rates down. Why get in the way of that several trillion-dollar-per-day tsunami of capital? Let the world tell us what our interest rates should be. Why get together and set “price controls on the cost of borrowing money” by regulating key short-term interest rates in the Fed’s widely-watched 8-times-a-year FOMC meetings? Economists know rent controls and price controls don’t work, so let markets work instead of forcing your ideas on us.

Question #3: If You Don’t Raise Rates, Do You Really Need 220+ PhD Staff Economists?

The Federal Reserve has serious responsibilities in overseeing banks, and for that they need qualified financial professionals, but do they really need 220+ PhD economists in the Federal Reserve’s Temple in Washington, DC? Maybe this is a case of too many hammers in search of too many nails to pound.

Just asking…

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. *All content of “Growth Mail” represents the opinion of Gary Alexander*

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