Richard M. Kovacevich is the former chairman and CEO of Wells Fargo, and according to him, the Fed should still proceed with the rate hike. Kovacevich argues that, “a quarter-point fed-funds rate is so small compared to a likely neutral fed-funds rate of between 3 percent to 4 percent that this increase would still maintain a massively accommodating monetary policy. The market has been expecting an increase for some time and the Fed has also been signaling it.”
Kovacevich’s argument is based on the idea that when the market expects the Fed to do something that the Fed has to inevitably do at some point, the Fed should do it as soon as possible. The “most likely objection” to a rate hike in September is worry about deflation. The 2-percent inflation goal in response is unlikely to be achieved in the near future, according to Kovacevich.
The first problem he identifies are technology based: “given all the technological changes, improvements and innovations occurring in products we purchase today, how can anyone even measure inflation accurately.” The second issue is that, “low inflation has been helpful to our economy because although wages have been low, inflation has been even lower, increasing the purchasing power of the average American worker.”
Kovacevich continues to say that the Fed is right to worry about deflation, which occurs when, “consumers have money to spend but don’t spend it because they expect prices to decline in the future, which increases the savings rate.” He continues to explain that, “if deflation occurs and becomes widespread, economic output falls and a recession or depression could potentially occur.” However, the Fed should be watching the savings rate—not the inflation rate—to determine the possibility of deflation. If savings rates were well beyond normal levels, there could be a deflation risk. However, the savings rate has been “well within historical norms.”
The former Wells Fargo CEO explains that monetary and fiscal policy makers should, “not be focused on increased inflation. They should be focused on growing our GDP at a 3 percent of greater rate. To achieve this, in addition to a fed-funds increase, the administration and Congress should agree to lower marginal individual and corporate tax rates in a revenue-neutral way.” What is Kovacevich’s suggestion for lowering marginal individual and corporate tax rates in a revenue neutral way? “Deleting most all tax deductions, imposing a 15-percent tax surcharge on corporations repatriating dollar deposits held overseas generating $300 billion in revenue to refund the highway trust fund, increasing defense spending, investing in new infrastructure projects, eliminating job-killing regulations that are stifling productivity, building the keystone pipeline, allowing the export of gas and oil,” and plenty more.
No matter if you agree or disagree with Kovacevich’s ideas, they are certainly thought provoking. As the decision for a rate hike looms, and markets continue to react in speculation, talking to a financial advisor can help ease any concerns you have about your family’s wealth and your portfolio. If you’d like to discuss any possible changes in your finances, contact an expert at Apex Financial Advisors today to get started.