The Federal Reserve on Wednesday delivered another miraculous performance by hinting that they would raise interest rates and then doing the opposite.
Chair Janet Yellen and the bank presidents met for their Federal Open Market Committee to discuss the state of the economy and whether they should raise the interest rate. As expected by most investors, rates stayed the same.
The problem was that after the Fed’s decision, financial markets boomed to a strong finish. Nasdaq closed at an all-time high.
This trend occurs when the Fed promises to raise rates and then chickens out at the last minute.
In December 2015, the Fed vowed to raise rates several times in 2016 and have yet to do so. Each time FOMC meets, they come up with excuses to hold the rates low.
The never-disappointing Yellen did just that, citing sluggish economic growth and the potential for recession as reasons to hold rates steady. She neglected to mention that it was their fault that we are on the recession fence.
I don’t think we should trust the ones that put us in this mess to fix it.
The subhed “So what’s next?” of a Business Insider article provided evidence of a near-guarantee raise hike in December.
At this point, the Fed has no credibility — each year they have had hike goals and haven’t met a single one. The good news is this piece of evidence softens the blow for investors, and the financial markets in general, because a hike is possible.
Moreover, the pledged hike wasn’t more than a quarter to half of a percent. That’s something investors wouldn’t have to sweat over.
The question I have for U.S. investors is this: Wouldn’t it be nice to invest your money based on a company’s economic performance rather than based on the wave of the government wand?
The Fed has way too much power with the ability to control interest rates because, as you can see, the market reacts to a lot.
Yellen cautioned that if they raise rates too fast, a recession could happen and plunge the economy into another crisis.
The Fed has explored other, less traditional options to handle the economy in crisis such as purchasing private assets from companies or readjusting their target inflation rate. These are some of the boldest and most outrageous ideas the Fed has suggested yet.
Former Congressman Ron Paul said, “Investors may seek out companies whose assets have been purchased by the Federal Reserve, since it is likely that Congress and federal regulators would treat these companies as ‘too big to fail’… could also strengthen the movement to force businesses to base their decisions on political, rather than economic considerations.”
This means that if the Fed begins to buy up private company assets, they would need to show some sort of favoritism. What would be the drivers of this favoritism? Who deserves to have asset purchases and who does not?
This could cause even more malinvestment in the economy.
The only surprise is that three of the presidents voted for a hike in rates in the past FOMC meeting. This strongly indicated that the Fed had called a ‘time out’ on the economy for the last time.
Guess what, Yellen? We are approaching the fourth quarter and there is only a few more minutes left on the clock. Don’t spike the ball on the one-yard line.
Opinion columnist John Brucato is an economic senior and can be reached at [email protected]
Once upon a time, Senior Citizens used to live off the interest on their savings.