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What is the Fed going to do?

March 18, 2015

This seems to be the only thing that matters in our financial markets these days. What is the Federal Reserve going to do? Financial media and Wall Street are obsessed with whether the Fed is going to remove the word “patient” from their discussion points as it relates to when they may begin raising interest rates. This obsession should be alarming to us all. Why should a free market economy be obsessed with central bank actions, much less whether a single word is dropped from the Fed vernacular at their most recent meeting? Isn’t there a time where we stop and say, this is crazy, how did we get here? Markets hang on every word spoken by our great wizards of finance. In my book, this is not what healthy economies are made of. Jim Grant does a great job succinctly explaining the problem with the Fed interventionism. It is interesting that the CNBC interviewer desperately wants Grant to say it is “possible” that the Federal Reserve can actually pull this off and the economy can slowly recover. It is like she is saying, “Give us some hope here Jim! What happens to us if we lose hope in the Federal Reserve’s experiment?” Grant handles the question masterfully.

Here are some other concerns with FED policy. Finally some more “respectable” investors are beginning to sound off.

In both the interview and article I’ve linked to above, the point is that we are living on faith and when the realization finally kicks in that the Fed policy hasn’t worked and won’t work, that is when the game changes and probably changes rather quickly and dramatically. Our world central bankers have found themselves between the proverbial rock and a hard place. They have chased poor monetary policy with worse monetary policy and they have dug the hole deeper and deeper. Now they have to find a way to communicate how they will soon be “normalizing” interest rates as proof their policies have worked and the “recovery” is real, yet knowing deep down that they likely cannot normalize interest rates because the economy is to fragile as a result of their policies. This is how you get such ridiculous statements as “I think it is important to get started and to start normalizing policy,” which St. Louis Fed President James Bullard said in an interview with The Wall Street Journal. “Even once we start to normalize, interest rates would be extraordinarily low.”

At some point in the not-too-distant future I think we will see a moment of clarity much like we saw in October 2014, when the above type of noncompliance with mainstream thinking gathers momentum in more corners of the investment world and market turbulence returns only with a multiple attached to it. In the interim the Fed may want to quote the infamous words of Rodney King, when he said, “Can’t we just all believe?” Well, maybe that isn’t exactly what King said, but that is what the Fed would like you to do.

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One Comment
  1. Wayne Heine permalink
    March 19, 2015 1:49 pm

    I know it has been said many times before, but how can the Fed even speak about raising interest rates in light of the huge federal debt? Answer, in reality they can’t. If I remember correctly the National Debt it is approximately, $18 trillion in addition to a Fed Reserve debt of approximately $5 trillion, give or take a few billion. A 25 basis point increase in the interest rate represents a significant increase in the cost of debt service required to just pay the interest on the debt. No one dare discuss the possibility of paying on the principle? Bottom line the Fed can talk all the Fed Speak they feel compelled to spout, but bottom line, rate increases are only a fantasy. In reality they are DOA.

    If any of the readers are interested in finding out what 25 points cost, just take 1% of 24 trillion (National Debt+Fed Reserve Debt = 23 Trillion) divide the product by 4. I’d do it but I can’t count that high. Once you do that little exercise, increase the rate of the 10 bond to a normal interest rate of 4-6%. That number is way beyond my pay grade. But, it is really, really, really big.

    In my humble, insignificant, opinion all this interest rate talk is just to juice the markets and make everyone feel better. However, if the Fed gets pushed into a corner they may raise the rate by a quarter percentage point just to give themselves some perceived credibility. A move such as that would have no appreciable impact on the real juice behind the raising stock market —STOCK BUY BACKS! Money will still be cheap and companies buying back their own stock will still be a good strategy.

    Jon hope all is well,

    Wayne

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