Investor’s column: Here’s why raising interest rates doesn’t mean the end of the party

We all know the story of Goldilocks and the three bears and have heard the term “thread the needle.”

That childhood story and the phrase tied to getting thread through a small opening are both references to creating a “just right” fit.

When applied to our economy, it describes two efforts to make our economy operate at full capacity, but not boil over. When getting things just right, there is no room for error.

As you might imagine, there is great interest in the moves of Federal Reserve Chairman Jay Powell, who is charged with leading the board of governors with conducting the nation’s monetary policy.

Such great interest that recently President Donald Trump used the word crazy to describe Powell’s most-recent policy statement. The independence of the Fed protects the governors under Powell to make decisions without fear of being fired.

The history of heavy conflict between the president and the Fed is limited. Occasional comments abound, but real pressure hasn’t been seen since Richard Nixon and Lyndon B. Johnson.

That’s not to say that George H.W. Bush didn’t blame Alan Greenspan for not raising rates in the early 1990’s that caused a recession that allowed Bill Clinton to get elected. Or Ronald Reagan to initially describe Paul Volcker who had to aggressively raise rates to stop high inflation as “erratic.”

I believe that we have had excellent Fed chairs these past 10 years since the Great Recession and we have a lot to be thankful for their efforts to overcome financial strains on our financial system.

The question of whether Powell is being too hawkish (too quick to raise rates) or is he just right with his commentary and board’s current policy position?

The commentary to raise rates to protect against inflation and market imbalance (inflation below 2 percent is the goal) is rooted in our tight labor market.

To be specific, I was recently getting a haircut and noticed the price proudly listed on the wall at $16. Granted, I was not at a salon where it is $35, but this nationwide firm uses the word affordable in its marketing tag line. I remember the price in the $12 area not so long ago.

The primary driver of that price is the company’s ability to cover its overhead and pay a wage high enough that a hair stylist, when averaging tips, can confidently believe that they are getting paid fairly.

Because there is a shortage of employees, employers have to offer better wages and benefits if they expect to have anyone interested in working for them.

As the phrase goes (coined by Fed Chairman William McChesney Martin decades ago) the job of the Fed is to take away the punch bowl just as the party is getting going.

Are we at the peak? It sure looks like it. Inflation meters say we are at close to our target. Raising rates doesn’t mean end the party.

There have been eight interest rate cycles since the mid-1950s, and the market went up multiple years on average after each rate hike.

Danny Wood is an independent financial advisor with Shoreline Financial Partners in Bradenton. To learn more visit shorelinefinancialpartners.com.