Danielle DiMartino Booth does not hold the US Federal Reserve in high regard. At the 2019 CFA Institute Seminar for Global Investors, the Quill Intelligence CEO and chief strategist called the central bank one of the most unproductive institutions on the planet.
DiMartino Booth’s perspective is informed by her tenure advising the Federal Reserve Bank of Dallas, which she joined after working on Wall Street. At the start of her career, she wasn’t quite sure what the central bank did. “Even though I didn’t really understand what the Federal Reserve was,” she said, “I had a sense that there was this invisible hand at work in the markets.”
While she saw the Fed’s influence playing out in those markets, she did not anticipate how extreme that influence would become. “The Federal Reserve would, at some point – where we are today – come to literally take over what we term price discovery,” she said.
When the price discovery mechanism fails, it becomes impossible to tell whether bond markets are accurately reflecting the financial health of corporate issuers. Meanwhile, debt has piled up.
“The corporate debt market in America has doubled in a post-crisis world,” she said. And the investment-grade bond market is dwarfed by increasing amounts of high-risk debt. According to a Morgan Stanley report from earlier this year, more than half of all investment-grade bond issues have BBB ratings that would lose their investment-grade status and become high-yield debt in the event of a credit downgrade.
Jerome Powell, the chair of the Fed, has acknowledged the growth in corporate debt and how the highly leveraged business sector could amplify any economic downturn. “It seems as if he went to the Greenspan School of Understatement,” DiMartino Booth said.
She also criticized the way that the unemployment rate is used by Fed officials when making policy decisions. “The people at the Fed talk endlessly about the near 50-year low in the unemployment rate,” DiMartino Booth said. But that isn’t really an effective economic indicator. “If you’re following it, you’re driving through the rearview mirror,” she said. “The irony of central banking policy is that they continue to hang their hat on the 50-year low in the unemployment rate and refuse to look at any of the leading indicators.”
Current conditions also limit the Fed’s ability to act. “In an environment in which risky asset prices are overvalued to the extent that they are today, you have a much shorter runway in between the point of yield curve inversion and the onset of recession,” she said.
And problems could arise from either domestic or international sources. “The world is in kind of this thing called a recession. Now, we don’t talk about it, because it’s not polite,” DiMartino Booth said. However, she sees signs of slowing and struggling economies across the globe.
“Somehow, some way, Germany – third largest exporting nation – Germany managed to eke out zero percent growth, such that it was not two consecutive quarters of negative GDP,” she said. “But everything we’ve seen out of Germany since then suggests that they’re going back into negative territory.”
Amid all these developments, Powell is in a difficult position. “There’s not much he can do,” DiMartino Booth said. “You don’t have a lot to work with when the next discussion around the table is negative interest rates.”
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