Time to pay the piper for nearly 10 years of economic repression.
“One irony of the current moment is that the Keynesians who presided over nearly a decade of secular stagnation are now worried that the economy is “overheating.” Then again, they said faster growth wasn’t possible, so they almost have to dismiss it.”
The Bernanke Correction
Asset prices are adjusting as financial repression ends.
The Editorial BoardFeb. 9, 2018 7:13 p.m. ET
In his typical way, Donald Trump lumbered into part of the truth this week with a tweet. “In the ‘old days,’ when good news was reported, the Stock Market would go up,” he wrote. “Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
He’s referring to the paradox that stock prices fell despite a strengthening U.S. and global economy. But Mr. Trump is missing that faster growth requires a fundamental shift in the monetary policy of the past decade. In particular this means the looming end to the financial repression that the Federal Reserve has been practicing since the financial panic. In that sense this is the Ben Bernanke correction, as the Fed and other central banks unwind the former Fed chairman’s unprecedented monetary experiment.
For nearly a decade the Fed has intervened in financial markets to repress the long end of the bond market. It scooped up the bulk of new long Treasury bonds, as the European and Japanese central banks later did in their economies. The idea was to push investors into riskier assets like real estate, junk bonds and stocks as they sought greater returns that they couldn’t get in Treasurys. The policy worked as asset prices rose, though it did far less for the real economy and workers without assets.
Janet Yellen maintained the Bernanke policy as long as she could, and only recently has the Fed started to unwind its asset purchases and raise interest rates. Europe and Japan still haven’t begun, but faster growth suggests the end of the Bernanke era beckons there too. This is what investors are anticipating, even as they see the good news that economic growth is accelerating.
Volatility and interest-rate risk are thus returning to equities. This doesn’t mean all of the stock gains in recent years have been an artificial “sugar high.” Higher earnings have also been important. But it does mean that asset prices will reset based on the anticipation of more normal monetary policy and the return of real interest rates.
Keep in mind that no one really knows how this will turn out because there is literally no precedent for the monetary policy of the past decade. Mr. Bernanke and Ms. Yellen have left new Chairman Jay Powell the difficult task of reversing their Fed policy without tanking the economy. Eventually asset prices will find a new level that reflects economic fundamentals, but the process may be messy, as this week suggests.
The good news is that U.S. economic fundamentals are as strong as they’ve been since 2005, and maybe 1999. And in that sense the Trump -GOP policy mix of tax reform and deregulation is well timed. The Trump policies and faster growth around the world are crucial if we are going to keep the expansion going and live through the end of financial repression. We need supply-side incentives to drive growth to survive the Bernanke-Yellen monetary correction.
One irony of the current moment is that the Keynesians who presided over nearly a decade of secular stagnation are now worried that the economy is “overheating.” Then again, they said faster growth wasn’t possible, so they almost have to dismiss it.
Mr. Trump’s instinct as a real-estate guy is always to want lower interest rates. But the more he demands low rates amid faster economic growth, the higher rates he is likely to see and sooner than he imagines. Faster economic growth and a tight labor market will mean rising wages for the working men and women who elevated him to the White House. Stocks will eventually adjust and follow a growing economy, and Mr. Trump needs to let the Fed continue on its path back to normal.
“One irony of the current moment is that the Keynesians who presided over nearly a decade of secular stagnation are now worried that the economy is “overheating.” Then again, they said faster growth wasn’t possible, so they almost have to dismiss it.”
The Bernanke Correction
Asset prices are adjusting as financial repression ends.
The Editorial BoardFeb. 9, 2018 7:13 p.m. ET
In his typical way, Donald Trump lumbered into part of the truth this week with a tweet. “In the ‘old days,’ when good news was reported, the Stock Market would go up,” he wrote. “Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!”
He’s referring to the paradox that stock prices fell despite a strengthening U.S. and global economy. But Mr. Trump is missing that faster growth requires a fundamental shift in the monetary policy of the past decade. In particular this means the looming end to the financial repression that the Federal Reserve has been practicing since the financial panic. In that sense this is the Ben Bernanke correction, as the Fed and other central banks unwind the former Fed chairman’s unprecedented monetary experiment.
For nearly a decade the Fed has intervened in financial markets to repress the long end of the bond market. It scooped up the bulk of new long Treasury bonds, as the European and Japanese central banks later did in their economies. The idea was to push investors into riskier assets like real estate, junk bonds and stocks as they sought greater returns that they couldn’t get in Treasurys. The policy worked as asset prices rose, though it did far less for the real economy and workers without assets.
Janet Yellen maintained the Bernanke policy as long as she could, and only recently has the Fed started to unwind its asset purchases and raise interest rates. Europe and Japan still haven’t begun, but faster growth suggests the end of the Bernanke era beckons there too. This is what investors are anticipating, even as they see the good news that economic growth is accelerating.
Volatility and interest-rate risk are thus returning to equities. This doesn’t mean all of the stock gains in recent years have been an artificial “sugar high.” Higher earnings have also been important. But it does mean that asset prices will reset based on the anticipation of more normal monetary policy and the return of real interest rates.
Keep in mind that no one really knows how this will turn out because there is literally no precedent for the monetary policy of the past decade. Mr. Bernanke and Ms. Yellen have left new Chairman Jay Powell the difficult task of reversing their Fed policy without tanking the economy. Eventually asset prices will find a new level that reflects economic fundamentals, but the process may be messy, as this week suggests.
The good news is that U.S. economic fundamentals are as strong as they’ve been since 2005, and maybe 1999. And in that sense the Trump -GOP policy mix of tax reform and deregulation is well timed. The Trump policies and faster growth around the world are crucial if we are going to keep the expansion going and live through the end of financial repression. We need supply-side incentives to drive growth to survive the Bernanke-Yellen monetary correction.
One irony of the current moment is that the Keynesians who presided over nearly a decade of secular stagnation are now worried that the economy is “overheating.” Then again, they said faster growth wasn’t possible, so they almost have to dismiss it.
Mr. Trump’s instinct as a real-estate guy is always to want lower interest rates. But the more he demands low rates amid faster economic growth, the higher rates he is likely to see and sooner than he imagines. Faster economic growth and a tight labor market will mean rising wages for the working men and women who elevated him to the White House. Stocks will eventually adjust and follow a growing economy, and Mr. Trump needs to let the Fed continue on its path back to normal.
