While the Federal Reserve did not raise the overnight borrowing rate at the August FOMC last week, I was chilled to read the US central bank explicitly describe the economic growth as “strong”. The last time this happened was May 2006 at the height of the Wall Street credit bubble that culminated in financial Armageddon two years later.
What is the significance of the Fed’s new Powell Fed language on economic growth? One, the FOMC conclave believes that we are on the precipice of a late cycle peak, the point when wage inflation risk begins to rise. Two, “strong” economic growth means the Fed will keep raising interest rates until the liquidity cycle is choked to prevent economic overheating. Three, this means King Dollar goes ballistic and devastates emerging market currencies. Four, excess liquidity turns into a credit shock as the world’s cost of capital surges higher. Five, companies, countries and industries that borrowed recklessly in the easy money post-Lehman era will go belly up as LIBOR and Treasury bond yields spike higher. Six, the biggest risk in life and markets are the risks you never even knew exist. These risks emerge with a vengeance when the Fed embraces tight money.