The Federal Reserve is frozen. Its recent decision and its convoluted reasoning suggests an inability to act. Janet Yellen and her team reach for tortured justifications to substantiate further zero interest rate policy. (ZIRP)
Let us revisit the mission statement of the Federal Reserve.
“conduct(ing) the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”
We are told the reasons the Federal Reserve decided not to raise interest rates are three fold.
First, they believe that employment has not improved to a sufficient degree.
Bernanke’s position back in June of 2013 was that 7% unemployment was a target and an indication of “substantial improvement." "Since December (2012), the Fed has said short-term rates will stay very low until the jobless rate goes below 6.5%, ..”
The current unemployment rate is 5.1%. What is the new “target” Janet?
Second, soft inflation - the inflation rate is not at a rate high enough to warrant a rate rise.
The chart below displays what the Federal Reserve thinks is insufficient inflation.
CPI Table - Since December of 2008 (beginning of loose money policy) the consumer price index has risen 13% as the return on savings has been near zero. Yet all we hear about is “low inflation." Inflation, even as the government measures it, is real and constantly compounding.
Third, Global risks - foreign economies are weaker, notably China.
"The situation abroad bears close watching," Fed chair Janet Yellen said at a press conference Thursday. "Heightened concerns about growth in China and other emerging market economies have led to notable volatility in financial markets."”
What? Janet, read the mission statement again. There is nothing about considering foreign economies or markets. For that matter, there is nothing about promoting inflation. Quite the contrary.
In June of this year, the Chinese stock market, specifically the Shanghai Stock Exchange Composite Index made a record high. If weak foreign economic activity is a metric for the Federal Reserve not to raise rates, then what of the strong and record levels of just 3 months ago? And since when did the Federal Reserve of the United States adjust their monetary policy to fit the activities of foreign economies, many of which are manipulated by Communists? This new “duty” of the Federal Reserve is so distant from its mission statement the head spins. Is the suggestion now that if there is a weakness somewhere it will be a consideration in our interest rate policy?
Bubbles in Asian markets are now justifications for Fed non action. Communists manipulate the markets in China and Japan attempts to save their economy with misguided Keynesian policies. We are now told to accept the notion that the Federal Reserve should adjust its policies to the ramifications of the bad economic policies of other nations. Remarkable.
Peter Schiff wonders, “When will these "experts" finally connect the real dots and discover that the monetary medicine that the Fed has doused over the economy since 2008 has only created a weak and utterly dependent economy.”
We can now begin to assume that the Federal Reserve can not raise rates, only talk about it. Their reasoning for not raising rates reads like a list of excuses rather than solid monetary policy. Just three months ago, foreign and domestic markets were at or near all time highs. Unemployment was 5.2%. These conditions were not sufficient to warrant a rate rise. What then will it take, what are the metrics?
The Federal Reserves current position conflicts with its own previous declarations, thresholds and its mission statement. Yellen has said the Fed is data dependent, not market dependent. Yet as we see with this latest decision not to do anything, there will always be a reason “not to do anything”. The Fed maintains a hyper accommodative emergency policy. Constant stimulation is dangerous, even Cialis knows that four hours is too much.