E Federal Reserve And The Markets

Analysis and opinions of the financial markets vary depending on who is doing the analyzing. The most critical element that affects the song is the singer.

There is nothing wrong with that. But we should be aware that our own prejudice  clouds our perspective. However, there is more that is not so obvious. With that in mind, lets take a look at things.

Today, more than ever before (at least it seems that way), focus is on the Federal Reserve. Even economists and the general public have joined the throngs of interested observers.

Stocks and bonds fell significantly over the past several days, partly in response to statements by Chairman Powell. The Chairman’s remarks indicated the intention of the Fed to continue its push to raise interest rates more aggressively, and without seeming regard to any deleterious effects on the economy and the stock market.

So, we hear criticism that the Fed is guilty of policy error. “The Fed needs to be more accommodative at this time.”

Maybe; maybe not. Not too long ago, people were complaining that the Federal Reserve was not acting decisively enough.

Part of the problem is seeing the entire situation for what it is – and not for what we think it is, or want it to be.

Inflation and low-interest rate policies were slow in stimulating the desired results.

As with a drug addict, each succeeding monetary fix is less and less effective.  The fixes, at best, allow the patient (i.e. the economy) to sustain life temporarily. And with each passing day, the possibility of slipping into a coma (recession, depression, etc) increases.

Continuing down the path of artificially low interest rates and ultra-cheap credit would eventually kill the U.S. dollar. The Fed knows this.

Their decision a few years ago to begin raising rates slowly was an attempt to begin a return to a more normal level of economic activity with interest rates at more reasonably normal levels.