The Federal Reserve Bank's Federal Open Market Committee (FOMC) last week did what everyone paying attention believed it would do, raised the federal funds rate by a quarter of one percent. What observers believed would occur, actually occurred. This is not always so. When it comes to economics, fiction and conventional wisdom, often wrong, tend to rule public discourse.
President Trump currently holds the distinction of purveying the outlandish economic fiction that he has inherited a tanking economy, "a total disaster," in his words.
The poor soul - wanting us to feel sorry for him, inheriting "such a disaster."
In fact, Trump has inherited an economy that has experienced 94 months of growth. While there is work to be done, Trump has benefited from the heavy lifting and resulting tail winds of eight years of the Obama administration. Let's review.
The Great Recession began in December 2007 under the W. Bush administration and ended in June 2009 after the Obama administration took over, making it the longest recession since World War II. During the trough of the recession, unemployment rose to 10 percent.
Real Gross Domestic Product (GDP) fell 4.3 percent from its peak in 2007 to its trough in 2009.
Home prices, on average, fell approximately 30 percent from their mid-2006 peak. Many homeowners were under water, owing more on their homes than their market value.
The S&P 500 index fell 57 percent from its October 2007 peak. The net worth of U.S. households and nonprofit organizations fell from a peak of about $69 trillion in 2007 to a trough of $55 trillion in 2009.
Large Wall Street banks were in trouble. Failure of Lehman Brothers triggered near panic. There was real danger of collapse of the entire world financial system.
As the financial crisis and recession deepened, desperate measures were implemented on a global basis. U.S. measures included both fiscal policy and monetary policy.
Like many other nations, the U.S. enacted fiscal stimulus programs with combinations of government spending and tax cuts. These included the Economic Stimulus Act of 2008 (under Bush) and the American Recovery and Reinvestment Act of 2009 (under Obama). While these actions were necessary and helpful, many economists believed them too modest to do the job.
The Federal Reserve's response included both traditional and non-traditional actions. Traditional actions included reducing the federal funds rate from 5.25 percent to a range of 0-0.25 percent in December of 2008. The Fed made explicit its intention to keep the rate at exceptionally low levels "for some time."
The Fed's non-traditional policies included large-scale asset purchase programs, including U.S. agency mortgage-backed securities and debt of housing-related US government agencies. The Fed also purchased some $1.75 trillion of longer term Treasury securities. The objective of the traditional and non-traditional measures was to keep interest rates low and provide support for the housing market.
The recovery strategy was criticized for providing liquidity for big banks while not doing enough to rescue homeowners. Could the strategy have been more helpful to citizens? With hindsight, probably yes. But at the time, many voters opposed rescuing homeowners for "taking on debt they couldn't afford."
Since the Great Recession, economic recovery has been slow but steady. Trump and his Republicans have hammered the Obama administration for "presiding over the slowest recovery in history." The counter to that charge is that recovery has come from the deepest trough since the 1930s. It has been a long sustained recovery, bringing us to the recent Fed action of the quarter of one percent raise in the federal funds rate.
During his campaign, Trump chastised Fed Chair Janet Yellen for "politicizing the Fed" by keeping short-term interest rates low. However, keeping rates low was indeed the correct policy. She made crystal clear that rates would not be raised until the economy was strong enough to withstand gradually rising rates.
Trump also charged that the rising stock prices were due to low interest rates and the easy money policy of the Fed. If interest rates were raised, the "stock market bubble would burst," he insisted.
While there is some merit to the proposition that low interest rates favor stocks - low interest rates on alternative saving instruments make stock dividends look good by comparison - there are other factors affecting financial markets, such as anticipated corporate profits and, technically, the present value of anticipated future returns.
Wall Street and big-time money managers have been as nervous as a cat in a roomful of rocking chairs whenever the prospect of the Fed raising interest rates was even whispered. This, even though it would not happen until the economy showed sufficient strength. In contrast, one could argue that if the economy is strong enough to withstand the recent Fed action of raising rates, it should boost confidence, with positive effects on the markets.
So Trump becomes president and inherits an economy sufficiently strong that interest rates can be raised. Instead of the financial markets tanking last week, they held steady, even improving a bit, for which Trump is not shy about claiming credit.
We can be reasonably sure that future Fed actions will depend on the economy. Future trends of the stock market will depend less on Fed actions than on performance of the economy and related factors, including confidence in the White House and Congress, tenuous as of this writing.
This brings us to yet another economic fiction, that "business-friendly Republicans" are better for the economy and financial markets than "profligate, anti-business Democrats." Those who acted on that fiction by staying out of stocks since 2008 paid a heavy price in terms of handsome foregone financial gains.
But now, Republican true believers have their opportunity to throw some dough into markets flirting with all-time highs. Surely, financial markets nourished by "business-friendly Republicans" who are in absolute, total control can deliver returns far exceeding returns experienced under those "terrible anti-business Democrats."
But then again, maybe - probably - not.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
President Trump currently holds the distinction of purveying the outlandish economic fiction that he has inherited a tanking economy, "a total disaster," in his words.
The poor soul - wanting us to feel sorry for him, inheriting "such a disaster."
In fact, Trump has inherited an economy that has experienced 94 months of growth. While there is work to be done, Trump has benefited from the heavy lifting and resulting tail winds of eight years of the Obama administration. Let's review.
The Great Recession began in December 2007 under the W. Bush administration and ended in June 2009 after the Obama administration took over, making it the longest recession since World War II. During the trough of the recession, unemployment rose to 10 percent.
Real Gross Domestic Product (GDP) fell 4.3 percent from its peak in 2007 to its trough in 2009.
Home prices, on average, fell approximately 30 percent from their mid-2006 peak. Many homeowners were under water, owing more on their homes than their market value.
The S&P 500 index fell 57 percent from its October 2007 peak. The net worth of U.S. households and nonprofit organizations fell from a peak of about $69 trillion in 2007 to a trough of $55 trillion in 2009.
Large Wall Street banks were in trouble. Failure of Lehman Brothers triggered near panic. There was real danger of collapse of the entire world financial system.
As the financial crisis and recession deepened, desperate measures were implemented on a global basis. U.S. measures included both fiscal policy and monetary policy.
Like many other nations, the U.S. enacted fiscal stimulus programs with combinations of government spending and tax cuts. These included the Economic Stimulus Act of 2008 (under Bush) and the American Recovery and Reinvestment Act of 2009 (under Obama). While these actions were necessary and helpful, many economists believed them too modest to do the job.
The Federal Reserve's response included both traditional and non-traditional actions. Traditional actions included reducing the federal funds rate from 5.25 percent to a range of 0-0.25 percent in December of 2008. The Fed made explicit its intention to keep the rate at exceptionally low levels "for some time."
The Fed's non-traditional policies included large-scale asset purchase programs, including U.S. agency mortgage-backed securities and debt of housing-related US government agencies. The Fed also purchased some $1.75 trillion of longer term Treasury securities. The objective of the traditional and non-traditional measures was to keep interest rates low and provide support for the housing market.
The recovery strategy was criticized for providing liquidity for big banks while not doing enough to rescue homeowners. Could the strategy have been more helpful to citizens? With hindsight, probably yes. But at the time, many voters opposed rescuing homeowners for "taking on debt they couldn't afford."
Since the Great Recession, economic recovery has been slow but steady. Trump and his Republicans have hammered the Obama administration for "presiding over the slowest recovery in history." The counter to that charge is that recovery has come from the deepest trough since the 1930s. It has been a long sustained recovery, bringing us to the recent Fed action of the quarter of one percent raise in the federal funds rate.
During his campaign, Trump chastised Fed Chair Janet Yellen for "politicizing the Fed" by keeping short-term interest rates low. However, keeping rates low was indeed the correct policy. She made crystal clear that rates would not be raised until the economy was strong enough to withstand gradually rising rates.
Trump also charged that the rising stock prices were due to low interest rates and the easy money policy of the Fed. If interest rates were raised, the "stock market bubble would burst," he insisted.
While there is some merit to the proposition that low interest rates favor stocks - low interest rates on alternative saving instruments make stock dividends look good by comparison - there are other factors affecting financial markets, such as anticipated corporate profits and, technically, the present value of anticipated future returns.
Wall Street and big-time money managers have been as nervous as a cat in a roomful of rocking chairs whenever the prospect of the Fed raising interest rates was even whispered. This, even though it would not happen until the economy showed sufficient strength. In contrast, one could argue that if the economy is strong enough to withstand the recent Fed action of raising rates, it should boost confidence, with positive effects on the markets.
So Trump becomes president and inherits an economy sufficiently strong that interest rates can be raised. Instead of the financial markets tanking last week, they held steady, even improving a bit, for which Trump is not shy about claiming credit.
We can be reasonably sure that future Fed actions will depend on the economy. Future trends of the stock market will depend less on Fed actions than on performance of the economy and related factors, including confidence in the White House and Congress, tenuous as of this writing.
This brings us to yet another economic fiction, that "business-friendly Republicans" are better for the economy and financial markets than "profligate, anti-business Democrats." Those who acted on that fiction by staying out of stocks since 2008 paid a heavy price in terms of handsome foregone financial gains.
But now, Republican true believers have their opportunity to throw some dough into markets flirting with all-time highs. Surely, financial markets nourished by "business-friendly Republicans" who are in absolute, total control can deliver returns far exceeding returns experienced under those "terrible anti-business Democrats."
But then again, maybe - probably - not.
- John Waelti of Monroe, a retired professor of economics, can be reached at jjwaelti1@tds.net. His column appears Fridays in The Monroe Times.
