Form the Reformed Broker: This is a low-flying panic attack
There are too many people who believe that just because they have a blog and opinions, they can also pretend to be fed chairman, because obviously the fed is doing it all wrong, and it’s up to the lowly blogger to ‘set them strait’.
The FOMC meeting is on Wednesday, so as expected there is a lot of Thursday morning quarterbacking by said bloggers about how the fed is ‘holding back the economy’ by not raising rates.
I’m not a Fed critic, but this is just getting pathetic now. You think you’re protecting the economy with NIRP and ZIRP but at a certain point, you’re really just threatening it.
Prima facie, this logic is flawed. There is no evidence arbitrary raising rates and or setting a high inflation target will spontaneously boost real growth; if it did, they would have done it already. Japan would have done it. Europe…everyone! lol Really, think about it. I’m sure they (the fed) have considered all the options, with PHDs perusing hundreds of studies, eventually setting on low interest rates as the best form of policy. The odds of a financial planner blogger who moonlights as an economist suddenly finding something the fed has ‘missed’, is zero.
f you’re trying to produce confidence, then jeopardizing the ability to earn profits among the largest banks in the world is probably not the way to do it. And that’s exactly what these policies are doing, globally. Look at the European banks right now!
Hmm….last time I checked major banks like JP Morgan, bank of America, Citigroup, and Goldman Sachs are reporting record profits and have record high balance sheets. There is, again, no evidence they are being hurt by low interest rates. Why would they? Think about it. They make money from the differential (what they charge to lend vs. the base rate), so it doesn’t matter. If they are lending money at 10% and risk-free is .25%, that is a damn good deal for them. And all those overdraft fees, too. Also, high interest rates in 2005-2006 didn’t stop the financial sector from melting down in 2008. Europe’s banks are weak because Europe’s economy is also weak, not because of low interest rates.
Employment is growing, but probably toward its limit. Wage growth, despite the headline miss on jobs last month, is sticking. Employers are reporting open positions they need to fill and difficulty finding candidates. “Transitory” commodity weakness has been ameliorated somewhat by the rebound in crude. Housing is solid. Retail sales are not as bad as expected.
In spite of firming data, raising rates is unnecessary due to reserve currency status and the insatiable demand for low-yielding US debt, attributable the ‘flight to safety’ trade, which has really picked up since 2014 as Europe and emerging markets have faltered. Also, raising rates may tip the economy in a recession, like in the early 80’s after Volker embarked on his massive rate hike campaign. Unlike the 70’s though, there is scant evidence of inflation as measured by the CPI, although inflation exits elsewhere like rent, healthcare, and tuition.
Another common argument is ‘the fed is losing credibility’. Yaaawn. Been hearing that since 2009, and the market has since rallied 200%, and inflation is low and the dollar is high. Had you listed to those doomsayers you would have missed on one of the greatest stock rallies in history. Because they are not an elected office, the fed doesn’t care what you think, anyway.