Some things never change. Apparently, the interest rate for Federal funds is one of them.
To the surprise of no one – except the “experts” and journalists who have been writing about an anticipated rate increase – the Federal Reserve Board voted last week to keep interest rates flatlined at about zero, which is where they’ve been since 2008.
The Fed may not have raised interest rates, but it at least raised interest this time. The International Business Times called it, “one of the most widely anticipated Federal Reserve decisions in decades.”
Really? Why was this meeting any different from previous Fed meetings where interest rates remained unchanged? Because the media-academic-pundit intelligentsia decided that it was time to increase rates.
In a Wall Street Journal poll of economists in August, 82% of economists thought the Fed would raise rates in September. The week before the Fed met, 46% picked September as the most likely time for the Fed’s rate hike, 9.5% said the Fed would wait until October and 35% predicted that the Fed would wait until December. Just 9.5% predicted the Fed would wait until 2016 to raise rates.
The economists polled don’t have seats on the Federal Open Market Committee, but everyone assumes they must know something.
Experts Wrong Again
The Fed’s decision not to raise rates must have been quite a letdown. Even The Wall Street Journal, which should have known better, was running articles about investing after the interest rate increase, winners and losers after the interest rate increase, the interest-rate increase diet and the impact of the interest rate increase on hemlines (we’re exaggerating, but not by much).
While it’s true that some Fed members are getting restless for a rate increase, the count remains solidly in favor of the status quo.
That so many “experts” expected the Fed to raise rates while economies around the world are in even more miserable shape than the U.S. economy verges on the ridiculous. Keep in mind, too, that much of the world is following the U.S. lead and initiating some form of quantitative easing.
The dollar has been strengthening in comparison with other currencies and it would strengthen even more if the Fed increased interest rates while other countries are weakening their currencies. Imagine how cheap oil would be in the U.S. if that were to happen. The horror!!! The Fed’s goal of 2% inflation would be even more elusive.
We’re convinced that the Fed’s decision not to raise rates was based on the realization that a rate increase would have required a major rewrite of the Fed’s continuously rehashed policy statement. Clearly, the written word is not a strong point for this Fed. Here’s the most exciting sentence in the most recent policy statement:
“In determining how long to maintain this target range, the Committee will assess progress – both realized and expected – toward its objectives of maximum employment and 2% inflation.”
There hasn’t been much “realized” progress, but that doesn’t prevent “expected” progress, which never seems to turn into realized progress. People in the real world might say that if you haven’t realized the Fed’s simple goals after seven years of easy monetary policy, it’s not going to happen. Fed members, of course, do not occupy the real world.
What to Expect? More ZIRP, of Course
So dig in … interest rates could stay low for some time to come. What can we expect in the months … or, if the Fed is planning to continue ZIRP (zero interest rate policy) until it meets its goal, what can we expect in the years ahead?
Let’s pretend for a minute that it’s 2020 …
President Trump, criticized for following in the footsteps of his predecessor, President Obama, leads the news with his shocking admission that 12 years of ZIRP is helping Wall Street and hurting the poor and elderly, who save money, rather than investing it.
“They’re all losers,” Trump announces. “We need to reward those who take risks. I don’t give a @#$% about those who don’t, because they’re not really Americans. Real Americans take risks. Everyone else should be deported immediately.”
The Fed announces that its 10th round of quantitative easing is working, as the unemployment rate has dropped to 3%. President Trump takes credit for the drop, though, claiming that his policy of deporting anyone not fully employed has given the economy a boost.
Fed Chair Stanley Fischer notes that the inflation rate has jumped to 1.4%, proving that the Fed’s easy money policy is working. It’s a good thing, as the Fed’s bond portfolio is now at $12 trillion and the Fed is running out of bonds to buy.
Maybe we’re being too cynical.
After all, the markets acted rationally for a change, dipping on the Fed announcement, as it was interpreted as a sign that the economy is not thriving. Imagine that – the market dropping instead of rising on poor economic news. Maybe there is hope after all.