What the Heck is going on at the Federal Reserve?
I’ve been flipping properties and investing in the stock market for the last 7 years. I’ve turned into what the media calls, a Fed Watcher. Today, I ask what is going on at the Federal Reserve? The Fed raised rates the end of last year and provided guidance to continue for the 2016, to no avail! The Feds had there annual pow wow in Jackson Hole, where they indicated they were ready to raise rates agian and they didn’t. Here is a chart of the rate projections from last year 2015.
Now that we have seen a projection from last year, lets take a look at a projection from September of 2016.
Does this raise a credibility issue? According to Sam Fleming (Jan. 2016) after the first hike, time will be the determining factor. Now its September and the Fed hasn’t had to reverse course, but also hasn’t been able to maintain its targets. In a review provided by Harouvelis and Barnhart (Aug. 1989) on the evolution of the Feds credibility, they depicted a time when the Fed had been fighting hyperinflation, which help establish the Feds credibility. Does our Fed miss being needed?
One might ask, why does creditability really matter. The economy isn’t simple, and therefore it’s understandable, that the Fed keeps moving its targets. I’m going to drop a bomb on you here. When the Fed over supplies money to the market, they have a tendency to take it back, at the worst possible time. Here is an image of tightening around crisis.
The world of investing seems to function like this: when you need cash, you can’t find it and when you don’t need cash, its everywhere! This brings me back to my initial question of what is going on with the Federal Reserve? Here is picture, showing what happens to the rates, when the Fed is chasing M1(money supply). We experienced something dramatic under Carter.
The graph shows rates in the early 1980’s spiking near 20%. You may have recalled your parents, at some point talking about Jimmy Carter, and how he was the worst president, we ever had. The Fed raised rates from the day he entered office until the day he left office. He was in office from 1977 to 1981, in which case, the Fed Funds Rate rose from 4.61% when he arrived to 19.08%, when he left office. Imagine trying to buy a house with a twenty percent plus mortgage. When the Feds get this wrong, it has devastating consequences to your pocket book. The concept behind raising interest rates, is to decrease M1(money supply). The higher interest rate you pay; is the less money you have to spend. You can imagine a twenty percent interest rate, pretty much freezes spending and thus subdues the economy. So what the Heck is the Fed doing?
The main pillars of the economy are performing better then ever and yet the Fed wont raise rates. The stock market is sky high as a result of these low rates and unemployment now stands at 4.9%. In light of this, the Fed keeps moving the finish line to hike rates. The Federal Reserve says its bipartisan. However, they will have kept rates low for an entire presidency, curious? I think the Richmond Fed nailed it, with this chart tracking rates.
If the rule recommendations (red and blue lines) hold any valitity, then our next president will be the Jimmy Carter for the millennia’s and potenitally the highest interst rate provider of the millennium. I enjoy reading and debating, please leave your comments below.
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Sam Fleming. (1/29/2016). Federal Reserve: Credibility on the line. The Financial Times Limited.
Gikas A. Hardouvelis, Scott W. Barnhart. (Aug. 1989). The evolution of Federal Reserve Credibility. The Review of Economics and Statistics Vol. 71, №3 pp. 385–393. The MIT Press
FRED Economic Data. (9/6/2016) Effective Funds Rate. Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS
Ben Reynolds. (July 22, 2016). How Much Do Interest Rates Effect the Market’s Price-To-Earnings Ratio? Retrieved from https://medium.com/@SureDividend/how-much-do-interest-rates-effect-the-markets-price-to-earnings-ratio-6b3ba8f0c2f5#.9sv6tcqfw
Bureau of Labor Statistics (September 9, 2016) CPS News Release. Retrieved from http://www.bls.gov/cps/
FRED Economic Data. Image. (9/6/2016). Effective Funds Rate. Retrieved from https://fred.stlouisfed.org/series/FEDFUNDS
Wesd440. Image (8/19/2015). House Fire Retrieved from https://openclipart.org/detail/225412/House-Fire
Kevin Mahn. Image. (3/26/2016). Fed Lowers Target For 2016 But Ready TO Start Raising Rates This Year. Retrieved from http://www.forbes.com/sites/advisor/2015/03/26/fed-lowers-target-for-2016-but-ready-to-start-raising-rates-this-year/#4f3f247a5920
Stefan Cheplick. Image (April 1, 2016) The Really Weird Thing About The Federal Reserve and How They Raise Rate. Retrieved from https://medium.com/@scheplick/the-really-weird-thing-about-the-federal-reserve-and-how-they-raise-rates-b045d94ded8e#.juz2nbehh
Jefferey M. Lacker. Image. (September 2, 2016) Interest Rate Benchmarks Retrieved from https://www.richmondfed.org/-/media/richmondfedorg/press_room/speeches/president_jeff_lacker/2016/pdf/lacker_slides_20160902.pdf
FRED Economic Data. Image. (9/06/2016). FOMC Summary of Economic Projections for Fed Funds Rate, Median. Retrieved From https://fred.stlouisfed.org/series/FEDTARMD