Ten years ago this weekend Ben Bernanke sat with Scott Pelley before "60 Minutes" cameras to discuss the economy.
It was such a rare event that in the introduction to the interview, Pelley made the point that "the words of any Fed chairman cause fortunes to rise and fall, and so by tradition the Chairman of the Fed does not do interviews. That is until now!". The episode aired March 15th, 2009, exactly 10 years ago and served as a financial tipping point.
Bernanke made it clear to Pelley in the interview that the new Federal Reserve's Quantitative Easing Program was "akin to printing money". The comment was so startling to Pelley he repeated when he heard in the for of a follow up question, "You've been printing money?". "Effectively, yes." was Bernanke's reply to a stunned Pelley.
The stock market boom that began with that interview has just turned 10 years old this weekend. Who could have predicted then, that Bernanke's interview would spark a bull run in equities that would go on to distort financial markets and price discovery ever since? This distortion has become so great, that now, the only thing that really matters for stocks is whether the Federal Reserve is easing policy, lowering interest rates, and printing money. When they are, stocks go up. When they stop, stocks go down.
This situation has been made all the more public recently by Donald Trump, who has been berating the new Federal Reserve Chairman, Jerome Powell for raising rates and causing his beloved stock market to drop. Trump has called the new chairman "crazy", and thinks "the Fed has lost their minds".
The Federal Reserve is meant to be an independent institution with a higher purpose and not to be swayed by political rhetoric. But that is exactly what has taken place. Powell, who in December, vowed he wouldn't be swayed by Trump's rhetoric saying "nothing would deter us from doing what we think is the right thing to do", has completely reversed course.
Rather than continuing on with his "right plan" of tightening monetary policy he had been openly committed to since being appointed, Powell will now "remain patient.” Monetary tightening is on hold indefinitely. He caved to Trump’s demands. The result is that markets have found some footing, but the conclusion is clear. The Federal Reserve’s interest rate policy controls the stock market. The question now is, how will The Fed ever tighten from here?
Trump has won the opening round in his face-off against the Federal Reserve. It's why 60 Minutes aired an interview Sunday night, again with Pelley, only this time with Bernanke, Yellen and Powell, the troika of Fed Chairs that have ruled the Federal Reserve over the last decade. These three clearly had a purpose and were on a mission.
That mission was to defend their actions over the last decade and to fend off criticisms that they can be swayed by the President, or for political reasons. Marching out the triumvirate of Fed officials on 60 Minutes was intentional, dramatic and meant to have an impact. Their obvious goal is to publicly defend against criticisms from Trump and the policies they've maintained for the last decade. Powell even indicated that Trump lacked the power to fire him.
Trump's arguments have been that The Fed has created financial distortions that have benefitted investors but had little to no impact on the real economy. In the run up to the election he was among their biggest critics. Now that he's tied himself to the scoreboard of the stock market, Trump can ill afford to let the Fed tighten further and will continue to badger the Fed remain patient and loose. It appears that he will get his wish and the Fed will stay on hold. Unfortunately for Trump, even remaining patient may not help the stock market much from this point.
Powell points out in the interview that 3% GDP is unlikely and will be rare moving forward, especially since job growth is closer to one percent, and labor U.S. labor participation is the lowest of any country in in the world. He goes on to say that the US has fallen behind in technology and education and that job growth will be harder moving forward. When Pelley asks about the likelihood of a recession, Powell answers ambiguously and suggests growth is slowing, but also good. One thing appears quite clear, the next decade will look nothing like the last.
We learned in physics that “every action, has an equal and opposite, reaction”. The results of the action of QE are now obvious a decade since inception. Over the last ten years the Fed controlled markets by expanding the money supply and keeping interest rates on the floor. While they were doing that everyone was happy and stocks boomed. What’s far less obvious moving forward will be the coming reactions now that this program is over.
It's my bet that 10 years from now, we will look back on this interview and have a much different interpretation of the effectiveness of money printing. I predict at that time, with the benefit of further hindsight and experience, we will conclude Bernanke's policies to print Trillions of Dollars were not heroic, but rather the beginning of the end of the age of American prosperity and greatness.
Adam Baratta is the author of the national best selling book "Gold Is A Better Way." He is one of the leading voices in the field of investments and precious metals today. Adam is the co-owner of Advantage Gold, the highest rated precious metal firms in the country, and the creator of the educational member site, www.goldisabetterway.com.
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