The following is a summary of our recent FS Insider podcast, "Danielle DiMartino Booth: Problems at the Fed, More Volatility for the Markets," which can be accessed on our site here or on iTunes here.
Danielle DiMartino Booth, founder of Money Strong and author of Fed Up: An Insider’s Take on Why the Federal Reserve Is Bad for America, warns that the US is more highly levered today than it was in 2008 and it won't be long before rate hikes start to impact the economy.
Though our own Fed funds risk neutral index (see below) shows Fed monetary policy as still relatively loose and not yet a threat, a combination of slowing economic growth and further rate hikes will eventually usher us into the next downturn.
Here's what Danielle told Financial Sense Newshour...
Fiscal, Monetary Policy in Conflict
We just had a huge fiscal stimulus with the recent tax cut, but monetary policy is going in the opposite direction.
Eventually, she warned, we’re going to have one of those moments where the Fed overshoots and they’ve moved too far, too fast.
Though Danielle admits we don't quite know when that point is yet, Fed monetary policy should now be seen as a headwind with the "final hike that breaks the market" much lower than in the past.
Source: Bloomberg, Financial Sense Wealth Management
Debt a Large Concern Going Forward
We’re on track for a trillion dollar deficit in 2019, at the same time China and others are buying fewer Treasuries.
It will be interesting to see if we hit 3 percent on the 10-year, as it might serve as a mental catalyst for markets, she said.
Danielle sees defaults heading higher, and thinks it's not going to take too much more in rate hikes before it impacts the economy.
We Need a Return to Normal Markets
We essentially have a lost decade behind us, Danielle said, and if the Fed pushes the economy into recession, expect more QE and debt.
Quantitative easing is problematic because it's habit forming, she stated. She’s hoping the new Fed chair, Jerome Powell, will stop the next round of QE in its tracks and allow the market to go back to being a price discovery mechanism.
It’s hopeful since Powell is the first non-Ph.D. to run the Fed in some time, she noted.
“I think he has a better understanding because he used to work in the shadow banking world,” she said. “But in a nasty recession, he'll have to have the spine to get through without any type of pressure from the White House.”