FRB Chair Powell testifies to Congress today about the state of the economy.  The market has fully discounted a 0.25% reduction at the conclusion of the July FOMC meeting.  I rhetorically ask will 0.25% cut make a difference?  Is it more hype than substance?  Economic growth has rebounded considerably since the Fed ended its six and half year policy of zero interest rates in 2017.

I believe a major reason for this economic rebound is a change in tax and regulatory policy.  The changes in both that has commenced since 2017 has been far more beneficial than then the quadrupling of the Fed’s balance sheet from 2010-2016 and the doubling of the national debt during the same tenure.

Last week I commented about the record $13 trillion in debt worldwide that is now priced to yield less than nothing.

Bloomberg writes the fastest growing credit bubble is in the negative yielding debt category, rising by almost $500 billion since the first days of July to almost $13.5 trillion.  The Newswire continue to write “with benchmark yield continuing to fall, more and more corporate borrowers are joining the free money club.  And Christine Lagarde [huge proponent of QE] at the ECB seems likely to keep the bubble going.”

According to the Grant Interest Rate Observer globally speaking interest rates are at a 4,000 year low.  Perhaps there is something bigger than monetary policy that impacts economic activity.

I rhetorically ask and partially quoting a headline in the WJS maybe the myth of monetary stimulus is unravelling.  The Journal references the 1938 Fed Chairman’s comments to FDR at the eve of the potential coming of the second depression stating there is nothing more he can do about it in the face of onerous New Deal policies.  Monetary policy has its limits and the limits in that era were reached.

Fast forward to today.  Other than creating some excitement for the algorithmic trading models, will a 0.25% really make a difference?

Quoting Ronald Reagan’s 1981 Inaugural Address “Government is not the solution to our problems, government is the problem.”

The above quote is the antithesis of the fundamental philosophy of the approximate 24 Democratic presidential candidates whose proposals are based upon increased government spending and interference in the lives of Americans.

Growth has rebounded to a 14 year high, the result of change in tax policy, a freeze in regulations, higher interest rates and a slowdown in the rate of growth of the deficit.

What happens if bona fide fiscal policy is enacted?  All must remember the government does not create jobs and economic growth but rather creates policies that encourage jobs and economic growth.

The strength of the US is its middle class and small business creation.  In recent eras of four percent growth (1981-1985 and 1996-2000), job and economic growth was propelled by creation of small businesses, defined as firms that employee less than 400 people.

Increase government regulation and spending stifles this sector.   Statements declaring the necessity to enact bona fide fiscal policy are far more essential to ensure growth, as was the case in 1938, far more essential than a 0.25% rate reduction.

Will FRB Chair makes utter something close to this remark?

We will know around 10:00 AM.

Last night the foreign markets were mixed.   London was down 0.02%, Paris up 0.06% and Frankfurt down 0.40%.  China was down 0.44%, Japan down 0.15% and Hang Sang up 0.31%

The Dow should open nominally lower ahead of Powell’s testimony.  The 10-year is off 9/32 to yield 2.10%.


The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.