Moneybeat: Less Fed, more growth

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JENNY ROUGH, HOST: Coming up next on The World and Everything in It: The Monday Moneybeat.

NICK EICHER, HOST: Time now to talk business, markets, and the economy with financial analyst and advisor David Bahnsen. David heads up the wealth management firm the Bahnsen Group, and he is here now. 

Good morning, David. 

DAVID BAHNSEN: Good morning, Nick. Good to be with you.

EICHER: Well, David, let’s begin with the first Federal Reserve meeting chaired by Kevin Warsh. One of the themes of that press conference last week was that financial markets have become too focused on the Fed itself. 

Let’s have a listen to this:

WARSH: So, I think financial markets perform best when they react to incoming data. I think the financial markets work less efficiently when they ask a question: How will the Federal Reserve react to that incoming information?

The more that markets are paying attention to what’s happening in the real economy, deciding what’s good data and what’s less good data, financial market prices are probably the most important source of information to guide central bankers.

Well, David, that struck me as a pretty remarkable thing for a Fed chairman to say. 

For years now, we’ve lived in this world where investors seem obsessed with guessing what the Fed is going to do next, and we talk about that quite a bit. At least, there is a lot of media coverage to that effect. But Warsh seems to be saying that’s exactly the problem. 

What is he trying to accomplish here?

BAHNSEN: Well, there’s a number of things going on, but I think they can be reduced to that, the way he positioned it as wanting economic activity to be about economic activity, folks interpreting data, drawing conclusions, implementing decisions, as opposed to a heavy over focus on what the Fed is going to think about data.

This is something he essentially said word for word, and it was the highlight of the press conference, in my opinion. 

But it is something that I’ve been talking about for a very long time, and what I want people to understand is how systemic it’s become that so much of financial market activity since the financial crisis has become what I think is an accurate use of the term financialization, where the focus becomes less on productive activity—the producing of goods and services, the risk taking and economic calculation that goes around that organic normal economic activity—and instead limited to a framework of either guessing what the Fed is going to do, or guessing what others are going to think the Fed is going to do.

And it’s limited productive investment. It’s limited productive capital spending. And Warsh is completely, totally against it. He has talked about the elimination of forward guidance.

Now let’s point out that they did still release a dot plot where the other Fed governors said where they thought rates were going. But what he did, which was pretty clever, was first of all you had half say they don’t think anything’s going to change and half say they think they’re going to raise a rate, which is basically a break even. And then one person didn’t do it at all. That person was him.

So they did the very best they could at basically giving something that didn’t mean anything, which to me sounds like pulling forward guidance.

The written statement itself was dramatically reduced, a very truncated version again, less copy content elaboration around it, and more just bottom line conclusion, because people want to take what the Fed has said and then use it to try to speculate about future activity.

Warsh wants to put an end to that, and I think it’s very healthy.

EICHER: And I suspected, David, when I heard that press conference, that you were going to love what Kevin Warsh had to say.

But let’s bring this out of the world of traders and economists for a moment. What does all of this matter to the average WORLD listener would you say? What’s the practical takeaway from a Federal Reserve chairman trying to pull the Fed back from the center of every single market conversation?

BAHNSEN: Well, there’s WORLD listeners that are investors, there’s WORLD listeners that are borrowers, there’s WORLD listeners that maybe are lenders. I mean, there’s all sorts of economic hats that we wear when we’re functioning in God’s creation. 

And I think what I would say to people who are aware of it and people who maybe aren’t as aware of it, is that we’ve all been living in an economy for quite some time where the Fed has quite a bit of input, quite a bit of influence, that their heavy degree of interventions in financial markets have an impact.

I’m not one who holds to a sinister view of their motive in this. I very much believe that they believe that they are doing the right thing to try to create better stability and better conditions towards their congressionally mandated dual mandate, which is price stability and maximum employment.

But that doesn’t, good intentions don’t mean that they’ve done the right thing. And by the Fed taking a more aggressive role in the economy, it affects all of us. Sometimes it may not be a bad thing, but it’s a distortive thing, it alters the way that something is to go.

And my view, in an economy of free men and women freely transacting, making decisions, and not having someone that’s there trying to kind of master plan and steward it, is you get a better outcome than when you have a heavy input from this sort of central entity, and I think that we’ve gotten a heavy input from a central entity known as the Federal Reserve.

Warsh is not getting rid of all this today or tomorrow. Their fingerprints into things are deep, they’re in a lot of ways. But I think he has put down a gauntlet of an incremental withdrawal from some of the heaviest interventions that the Fed has been a part of.

What does that mean to the average WORLD listener?

I hope it will mean a removal of a very big imposition in economic activity that I think will restore healthier, more organic economic activity. 

And by the way, there could be negatives that come from this. But you know, in the sense that a lot of times a patient can feel better by taking more and more morphine, but they’re doing more damage. And I think that with the Fed sometimes we can have the illusion that they’re helping things when in reality they’re keeping the patient sicker for longer.

I have no doubt that that’s happened for over 20 years now.

EICHER: Well now, another thing that caught my attention was Warsh’s rejection of a longstanding assumption in economics that stronger growth and stronger employment necessarily come with a trade-off, namely higher inflation.

Listen to what he says here:

WARSH: I don’t believe that we have a cruel choice. I don’t share the view that was expressed a few generations ago that Federal Reserve chairmen show up at a podium like this and say "you’ve got to choose, and you’re going to have to decide whether you’re willing to tolerate higher inflation to put more people at work." 

I don’t believe in that.

Now that is a pretty direct challenge to a way of thinking that has influenced central banking for decades, David. 

What exactly is Warsh pushing back against there, and why does it matter?

BAHNSEN: Well, it’s the first Fed chair of my life that I happen to know ideologically is not a Phillips curver, and then the first Fed chair to say that.

So, what I mean by that is the Phillips curve is an economic model that basically posits that when you have strong employment, it creates inflationary pressures. The strong employment puts upward pressure on wages, and when people are making more money, that pushes prices higher, and you get a negative spiral that this growth creates inflationary responses.

The problem with the model is it was disproven so thoroughly in inverse in the 1970s that we found out actually you can have high inflation and very low wages and at high unemployment. And if it doesn’t work one way, then it doesn’t work the other way.

But my argument as a free marketeer is that its fundamental flaw is to misunderstand that inflation is a monetary phenomena and growth is a healthy thing that often puts downward pressure on prices because of competition.

So there’s so much economic philosophy that goes into refuting Phillips Curve. 

This stuff is stuff I’ve basically been passionate about my whole adult life, and Kevin Warsh is the first Fed chair—there’s been other Fed chair people that would have nuanced their support of Phillips Curve—but Warsh is a vehement anti-Phillips curver, and so is David Bahnsen.

EICHER: All right, so before we go, Fed Chairman Warsh closed his first ever FOMC press conference by returning to that same theme.

As he wrapped up, he said this:

WARSH: Trends matter more than data points. What’s happening over three or six months matters more than any one data point, any one data release. And I’d say the jobs data has been moving in a good direction. If I heard one other thing around that subject over the course of the last couple of days, what I heard was that strong productivity-led growth is not something that we fear, but something we embrace.

Now that was the final thought that he had. I mean, his next words were “thank you,” and then he grabbed his notebook and left.

Why do you think he wanted to leave people thinking about productivity?

BAHNSEN: Well, it matters because he is setting the stage for where you could have low unemployment and good GDP growth and not believe you have to raise rates, not believe you have to be phobic or tighten money just because economic growth is good.

Now he also was adamant that he is there to generate price stability and that inflation is a choice, so he is not suggesting they need to go ease money either. 

But to me everything he said was that you should not assume if we have productive economic growth it means that inflation is coming. And Warsh is right about that, and I believe he is going to prove to be less hawkish than people believe, but not recklessly dovish either.

EICHER: All right. David Bahnsen—founder, managing partner, and chief investment officer of The Bahnsen Group. David writes at DividendCafe.com and at WORLD Opinions. 

David, thank you, and have a great week.

BAHNSEN: Thanks so much, Nick.

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