- John Williams, San Francisco Fed President
Despite a 1% contraction in the first quarter, policymakers are still resilient and are expecting a rebound in the second quarter. Hence, Federal Reserve Bank of Richmond President Jeffrey Lacker is confident GDP will be positive. The economy can grow around 3% this year, but what will happen in few years later? The global market is in a bubble, and it is not just stocks or housing prices, but a broad swath of assets. The Fed and other policymaker have embarked on the greatest deluge of extra cheap money ever. For years the Fed has been pushing down interest rates encouraging a flow of capital from government bonds to corporate bonds, and as a result provoking rally in stocks. And while economy has not been very responsive and was not expanding fast, corporate profits were roaring. While at first it was a result of a rebound in revenues, now companies are in deep costs cuts, staff reduction and stagnant wages. The latest case of Hewlett-Packard is a clear indication of the problem. The giant reported weak profits and pledged to cut additional 16,000 employees, while shares rocketed next day, because the company announced almost a 50% jump in its stock buyback allocation. The Fed is losing control and the bubble will come to the end soon, as there are no sustainable drivers. With no pickup in growth, companies will the forced to increase debt loads to fund share buybacks. Higher interest rates and inflation as well as lower profits will only bring the deadline closer.
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