Mr. Powell Throws Some Gasoline on the the Stock Market Fire

In his monetary policy testimony this week Fed Chairman Jay Powell all but told us there will be rate cut later this month. Perhaps more importantly he noted that the Phillips Curve that relates the unemployment rate with the inflation rate is broken. That is why he sees no problem with cutting rates in an environment where the unemployment rate is at a 50 year low.

But the real kicker in his testimony was his concern about economic weakness abroad, especially in Europe. We wrote in this space four years ago to the day ( https://shulmaven.blogspot.com/2015/07/two-history-lessons-for-janet-yellen.html) that when the Fed lowered rates to ease the burden on Europe, especially for the U.K., in July 1927 it set the stage for the late 1920's blow-off in stock prices. At the time NY Fed President Benjamin Strong noted to Deputy Bank of France Director Charles Rist that the Fed's move would be a "coup de whisky" for the stock market. He was so right and that move put the roar in the Roaring 20's.

So my guess is that with the economy still growing at a somewhat below 2% pace, in an environment of low real interest rates and low credit spreads, the Fed is pouring gasoline on a stock market that has already been making new all-time highs on a daily basis. The stage is set for a blow-off.