Federal Reserve Headlines – Fact or Fiction?

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When it becomes serious, you have to lie.” – Jean-Claude Juncker, former president of the Eurogroup of Eurozone finance ministers

On July 16, 2019, Chicago Federal Reserve President Charles Evans made a series of comments that were blasted across the financial news media. In the headlines from that speech and other statements over the past few weeks, Evans argued for the need to cut interest rates at the July 31 and future meetings.

I look at his rationale and provide you with supporting graphs and comments that question his logic supporting the rate cuts. I pick on Evans, but he is reiterating similar themes discussed by many other Fed members.

The issues raised here are important because the Fed continues to play an outsized role in influencing asset valuations that are historically high. As such, it is incumbent upon investors to understand when the Fed may be on the precipice of making a policy error. If asset prices rest on confidence in the Fed, what will happen when said confidence erodes?

The Fed’s mandate

Before comparing reality with his recent headlines, it is important to clarify the Fed’s Congressional mandate as stated in the Federal Reserve Act. The entire Federal Reserve Act can be found here. For this article, I focus on Section 2A- Monetary policy objectives as follows:

The stock market is at all-time highs, bond yields are well below “moderate,” unemployment stands at 50-year lows, and prices are stable. Based on the Fed’s objectives, there is no reason to cut rates.