Fed rate hike: ‘The market is finally saying thank you,’ economist says
Michael Cox, former chief economist for the Federal Reserve Bank of Dallas, weighs in on the latest Fed announcement and why the markets are reacting so positively.
Video Transcript
DAVE BRIGGS: Let's talk about it all with Michael Cox. He is the former chief economist for the Federal Reserve Bank of Dallas, and Ed Al-Hussainy, who is the Columbia Threadneedle Investments senior interest rate and currency analyst. We'll get rid of my sheets of notes. And Michael, just give you a blank slate. Your big takeaway from the Fed chair's speech and Q&A session?
MICHAEL COX: Well, I really did not like most of what I heard today because I heard Chairman Powell pointing the finger at other causes of inflation, supply chain problems, oil and gas problems, labor shortages, and so on. And I am totally with Milton Friedman, who I think is smarter than the whole room put together there, who said inflation is always and everywhere a monetary phenomenon, the result of too much money chasing too few goods.
Look, the Fed has increased the M2 money supply 43% since February of 2020. That's since the COVID began. 43% more money put into the economy is going to cause inflation. And you don't need to look elsewhere for something beyond that, beyond the Fed, for some reason why we have so much inflation. Inflation hit 16% on an annual adjusted basis in March. And it just keeps rising and rising and rising.
Certainly, it's good that the Fed finally raised rates today. And that, to me, is the reason that the market is up. The market is finally saying, thank you for stopping some of this hesitation. It's good the Fed raised rates today. But there's been too much hesitation, too much waiting, too little courage, too much talk and not enough action, too much admiration of Volcker, and not enough emulation of him. Volcker said the Fed has to keep this-- I mean, Powell said the Fed has to keep this from causing inflation expectations to build.
Well, guess what? They're already building. Look at the mortgage rates, which are 6.75%. We already have this inflation expectations building into the economy, hurting markets. And finally, the Fed raises rates, which should have started to happen over a year ago. And the market says, thank you. It's about time you did your job.
RACHELLE AKUFFO: Now it's interesting, though, because we're seeing this rally today. But then, just last week, we saw the markets very volatile, dipping into the red, even though they did build in this 50 basis point hike. So Ed, what's your reaction to what you heard today and how the markets reacted?
I think Ed may be muted there. Ed, if you can hear me, you're muted there. Until then, Michael, I'm going to have you respond then in terms of what you expected in terms of a 50 basis point rate hike and how aggressive the Fed might have to be for the rest of the year to try and catch up.
MICHAEL COX: Well, let me go back and answer. What I would have answered to your question is that it's hard to say that the market really expected this to happen because the Fed, many times in the past, said they were thinking about raising rates, but when the time came, they didn't. And they played the boy that cried wolf.
So until the Fed actually did what they said they were going to do, which finally happened today, the market really couldn't have that kind of rally that they finally had today. So I believe today was finally vindication that the Fed will, for once at all, do what they said they're going to do. Look, I think it's a very positive sign, and I hope that they continue. But I would really like to see some Volcker emulation, not just Volcker admiration.
