Last week, the Federal Reserve lowered its benchmark interest rate by 25 basis points to a range of 1.75% to 2%. Why has the U.S. central bank done this, and what does it mean for investors? In an interview with CNBC, renowned value investor Howard Marks (Trades, Portfolio) gave his take on what the role of the Federal Reserve is, and what it is not.
What is the Fed’s actual job?
There is an ideological debate over what the role of central banks should be. Marks thinks it is certainly not to create growth at all costs:
“For 100 years, it’s been the job of central banks to control inflation. Then, 30 to 40 years ago, they got a new job, which was to support growth of the economy so that jobs would be created. But this idea of preventing the next recession is neither of those two things. And it is a job that the Fed seems to have taken on now, and in his talk six weeks ago, Jay Powell talked about continuing the expansion. That’s not necessarily the Fed’s job.”
Marks also recounted a story about recently going to dinner at a friend's house and meeting a Fed president who told him that the job of the central bank is to create growth and employment over time. Notably, this is different from the idea of creating growth and employment every year, which is what Marks believes the current Fed course is attempting to achieve.
Marks believes the Fed is pandering to investors. Whatever its mandate is, it’s not there to stop equities from selling off:
“Should the Fed cut rates to stop the stock market from going down? Which is different from [stopping] a recession. So you want to create jobs. Maybe you want to prevent recessions - which I don’t think you can do in perpetuity - but do you want to cut rates to stop the stock market from going down? I think that’s totally illegitimate.”
On the economy
Marks’ skepticism on the direction of Fed policy ultimately stems from his belief the U.S. economy is in a good position.
“Our economy is doing pretty well. There are sources of strength - mostly our consumer. There are pockets of weakness - manufacturing, it’s having a lot of trouble being optimistic given the trade war...I don’t think it needs to be stimulated.”
For Marks, the fear with cutting rates in an environment where the economy does not need cuts is that when a recession hits, the Fed won’t have any arrows left in the monetary quiver to deal with a real crisis:
“If we have a recession, what do you do about it? Normally we cut rates to pull out of them. You want some room. I would hope that was the reason for Yellen’s program of rate increases, and it’s the reason why I don’t think we should cut rates right now.”
The European example here is illustrative. The European Central Bank continues to have negative rates, with the markets pricing in even further cuts. Meanwhile, inflation remains stubbornly low and the eurozone economy is weak. What, if anything, will the ECB be able to do to boost the economy in the event of a recession? The U.S. is not in this position - yet. But the fear is that if rates continue to be cut, the Fed will find itself in a similar position to its European counterpart.
Read more here:
- What Can Investors Learn From the Savings and Loan Crisis of the 1980s?
- Charlie Munger: He and Warren Buffett Have Very Simple Ideas
- Charlie Munger: The Problem With Wall Street
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