The ninth and longest-serving chairman of the U.S. Federal Reserve Bank was William McChesney Martin Jr. He served from April 2, 1951, to Jan. 31, 1970, and under five presidents.
Martin once said, famously so, the job of the Fed is to “take away the punch bowl just as the party gets going.” In other words, the Fed can be expected to raise interest rates following a recession just as the economy achieves peak growth.
There is no doubt that Martin’s description of the main job of the Fed is the best-known quote in history about the U.S. Central Bank.
The only other quote that comes to being equally famous is the one uttered by Fed Chair Alan Greenspan back in 1996, when he used the phrase, “irrational exuberance,” in a speech. Years later, Greenspan said the phrase came to him while writing the speech in the bathtub.
However, when Greenspan warned the markets about their irrational exuberance on Dec. 5, 1996, the Nasdaq, the tech index, hit the 1,500 level having rallied from 500 five years earlier.
But Greenspan did not “take away the punch bowl” until the spring of 2000. And when the Fed finally hiked rates, the Nasdaq collapsed.
From Investopedia: “The crash that followed saw the Nasdaq index, which had risen fivefold between 1995 and 2000, tumble from a peak of 5,048.62 on March 10, 2000, to 1,139.90 on Oct 4, 2002, a 76.81% fall. By the end of 2001, most dot-com stocks had gone bust. Even the share prices of blue-chip technology stocks like Cisco, Intel and Oracle lost more than 80% of their value.”
It would take 15 years for the Nasdaq to regain its dot-com peak, which it did in December 2015, when it rose to a bit over 4,700.
Thus, from the low posted in October 2002 of 1,139 to the high a month ago of about 14,000, the Nasdaq gained about 1,128% after falling nearly 78% in the years 1995 to 2000.
In my view, beauty is in the eye of the beholder, and so is irrational exuberance. Would Greenspan, now 95 years of age, view a 1,128% gain in the Nasdaq as irrational exuberance?
As for “taking away the punch bowl,” a recent article on CNBC news blared: “The Fed has embraced the ‘punch bowl’ and has no intention of taking it away.”
The article quoted the president of the San Francisco Fed, Mary Daly, as saying: “The Fed has no intention of tightening policy even in the face of roaring bull markets across several asset classes. We won’t preemptively take the punch bowl away.”
A week ago on CNN Business, current Treasury Secretary Janet Yellen, and Jerome Powell, who succeeded Yellen as Federal Reserve chair during the Trump administration, “stressed in prepared remarks that the economic pain caused by the COVID-19 pandemic would have been worse if not for the quick moves in 2020 by Congress and the Fed.” The headline of the CNN article was: “Yellen and Powell praise stimulus, but warn that more needs to be done.”
This week, President Joe Biden released details of a $2 trillion jobs proposal to focus on infrastructure and climate change. The Fed recently set up two new committees, the Financial Stability Climate Committee and the Supervision Climate Committee.
The White House is now pushing for another massive financial boost for the economy with infrastructure spending with climate change as a target, as well. And the Fed is trying to gauge the risks to the entire economy should climate change become more threatening.
Fed Chair Powell indicated, however, that climate change is not central to the Fed’s mission, but is nonetheless important. Keep in mind, however, that the longest-serving Fed chair stated clearly the job of the Fed is to “take away the punch bowl just as the party gets going.”
Personally, I believe that stocks, the Dow and a host of other markets are indeed caught up in a frothy bout of irrational exuberance. I also believe that the Fed has no intention of hiking rates anytime soon in an effort to “take away the punch bowl.”
If anything, thanks to the past stimulus packages and the new infrastructure and jobs proposal, the White House and the Fed are spiking the punch bowl and smiling while doing it.
Recently, an analyst used the term “untethered exuberance” to describe the current state of most markets thanks to the White House, Fed and Congress spiking the punch bowl. I agree with such a viewpoint and the logic and policy behind it.
Go to commodityinsite.com to learn the specifics of “untethered exuberance” from yours truly.