Columnist and market analyst Peter Tchir tells Newsmax TV that the Federal Reserve faces a formidable juggling task in raising rates while keeping the economy in balance.
“There's a belief right now that we might be in this good part of the economy where growth is good, it's reasonably strong but it's not so strong as to scare the Fed so we can actually get growth without being forced to slow down at the front end via the Fed,” he told Sunday’s “The Income Generation Show.”
“And that would be the so-called Goldilocks economy.” Brean Capital's head of macro strategy told David J. Scranton.
Tchir is referring to what is commonly called the Goldilocks principle, which states that when some quality of the items in a sufficiently large given sample can be arranged on a scale ranging from one extreme to another extreme (for example from extremely cold to extremely hot), some items will fall in a moderate range between these extremes.
U.S. stocks rallied after the November presidential election, with the S&P 500 posting a string of record highs up to earlier this month, on bets that the pro-growth Trump agenda would be quickly pushed by a Republican Party with majorities in both chambers of Congress. Investors, however, have been dialing back hopes that President Donald Trump will swiftly enact his agenda, Reuters reported.
Tchir said it’s not surprising that most investors will be confused if they try to read the tea leaves from the stock and bond markets.
As an example, bond prices edged lower Thursday. The yield on the 10-year Treasury note, which has skidded over the last few days, rose to 2.42 percent from 2.40 percent. The Dow Jones industrial average had jumped as much as 96 points just before 1 p.m. Thursday, but doubts about the bill cast a shadow over the market as hardline conservatives said they didn't support it. Stocks closed with a small loss.
“It's a growing concern to a lot of people because it's almost like the bond market is telling you something different than the equity market,” he said.
“The equity market seems to want to go higher, it seems to want to believe the growth story and yet there's that 10-year bond market that seems to be saying 'Hey, maybe this growth isn't really coming. Maybe we are once again due for some sort of pullback,’ so I think that's concerning,” he said.
“I would be much more comfortable seeing yields rise, showing growth and belief in the future rather than this ongoing concern,” he said. “Maybe the bond market is getting too pessimistic and we're actually ignoring some of the real signs of growth and optimism that we should be having,” he said.
The S&P 500, in its second longest bull market ever, has risen close to 10 percent since the Nov. 8 election on optimism about Trump's pro-growth agenda. With valuations at their highest in over a decade, investors have been expecting a pullback even if its catalysts haven't been clear, Reuters reported.
Meanwhile Fed Chair Janet Yellen has her work cut out in order to keep the economy stable amid a volatile global backdrop. He worries that the U.S. central bank actually has many viable strategies in case disaster should strike.
“We should've already moved to higher rates, we should be at much higher rates,” he said.
“I think the economy can function with higher rates and the fact that we're so low really gives us very little window of opportunity if we have another problem, if there is some sort of a pullback whether if something we do or something the rest of the world does, they don't have much ammunition," Tchir said. "Three rate cuts isn't going to do very much so they're going to have to do alternatives and whether it's QE or even beyond that and that's something I'm uncomfortable,” he said.
“I think one real concern I have is central bankers seem to love this idea of negative interest rates. You see it still in Europe, you see it in Japan and I think negative interest rates are one of the worst things that can happen," he said. "I would love to avoid negative interest rates. I think that's the direction we head next time which scares me,” he said.
As far as Trump's to-do list, Tchir thinks the sooner he can dismantle all the financial regulation from the Obama administration, the better.
“To me the Volcker Rule doesn't solve anything. So things like that that were kind of thrown on haphazardly and actually have hurt the overall market should be repealed,” he said.
“I do think there are some things that really go to the health and safety of the economic system and they should be careful to make sure those stay in place. So it's going to have to be a very thoughtful look at what went in with Dodd-Frank that's good and try to keep it and looking at some of the stuff that was over the top, isn't helpful and pullback on those.”
"The Income Generation" airs on Newsmax TV every Sunday at 10 am ET.
(Newsmax wires services contributed to this report).