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More of the Fed’s Market Disruption

July 11, 2017

Last week the Fed announced they would release the minutes from their previous meeting at 2:00 pm Thursday. That day a lot of market action was subdued waiting for that release so they could try to see what the Fed thought about the economy. The announcement and timing was complete nonsense and disruptive to any type of smooth market activity. Here are two previous blogs I posted on this subject.

The Fed’s Market Disruption Continues

POSTED DECEMBER 15, 2016

Yesterday the Federal Reserve dutifully increased its benchmark interest rate .25% and, once again, did so at a time to cause the must disruption to the markets – including the stock market. Just after the announcement, which was anticipated, the average trading volume increased almost 800%. However, in spite of this, the net change in the S&P 500 index was only about 1%. Hints were also suggested that the Fed will “likely” increase rates three times next year.

I presented my feeling about the Fed’s “importance” in interest rates last year, just after they announced their last increase. See the blog posted below. Today I want to make a few additional points.

  • Last year’s increase was a signal that the Fed believed the economy was getting stronger. Based on their assessment at that time it appears they were wrong – unless you include yesterday’s self-proclamation of economic strength.
  • “Stronger” is a subjective term if you are an economist or a Federal Reserve Governor. However, if you are still one of the unemployed or underemployed I believe they will disagree with the Fed’s assessment. Likewise if you are a small business person afraid of investing in expansion because of a doubtful adequate return.
  • I believe the economy is stronger because my stock portfolio values increased this year. However if you want to measure stronger by the sales growth of the S&P 500 Index companies which declined 1.25% this year there wasn’t any “stronger.” Drops in sales do not indicate strength!
  • If the Fed is as important as they imagine in their minds then why are two of the seven Governor positions vacant and why was 2013 the last time there was a full seven members? To me, this indicates the lack of importance of this body – at least in the eyes of Congress, which in and of itself shows the distain of their Constitutional responsibilities [this is a different story that I am not touching on now].
  • If Dr. Yellen feels that the economy is getting stronger and this will result in three increases next year, then what “proof” does she present? Actually there is no proof – this is more hocus pocus, just as her remarks last December.

We will have a new president next month with unorthodox political views and a businessperson’s disposition and this has created a burst of optimism. That might create a stronger economy next year. The Fed’s declaration yesterday and publicity seeking action will not.

The Fed’s Market Disruption

POSTED DECEMBER 17, 2015

 

Yesterday, the Federal Reserve announced a 25 basis point increase (0.25%) in interest rates. They did this at 2:00 pm, a time when corporations are precluded from announcing their earnings so as to not disrupt the market. Yet, the Fed makes its important announcements at a time that is likely to cause the most disruption. Why?

Perhaps what the Fed does is not that important in substance and the self-created media supported drama imagines an importance. Let’s look at some facts:

  • The increase of 0.25 percent will have no substantive effect on anything. Savings rates will not increase, corporate borrowing rates will not increase, the Treasury borrowing rates will likely not increase, credit card interest rates will not change, borrowing for major construction certainly will not change and home mortgage rates will not increase on any sustained basis
  • Even assuming the increase will have an effect, we are talking about one quarter of 1 percent. (Nothing meaningful to anything of any importance…)
  • The increase is used as a signal that the Fed believes the economy is getting stronger. It seems that the same signal could have been given by a press release with the attention paid to that being about the same as to the 2:00pm announcement – nothing
  • The media hypes the Fed’s actions so there is a reaction most notably in the stock market but most of that is smoke and mirrors and the reactive changes will dissipate days later
  • The Fed has some sway and control over short term rates but no influence on long term rates and their belief in their long term influence is very disappointing to me
  • The Fed believes they control long term rates though their maneuver known as Quantitative Easing where it bought up billions of dollars of home mortgages, but there is no evidence this created any meaningful benefit
  • The reality is that long-term interest rates are a reflection of the demand for long term funds
  • Borrowing is done for long term periods to finance investments in major projects with the anticipation of a positive return on investment (ROI), i.e. growth is anticipated and expected
  • In spite of low borrowing rates, many long-term construction projects were not initiated by businesses but, rather, by not-for-profits and colleges who did not have to be concerned with the ROI as long as they could expect contributors and rising tuition to cover the debt service
  • Today’s long-term borrowing levels are still at record lows signaling a clear indication of the expectation of slow growth, low inflation, and an inability to earn a reasonable ROI which is virtually nonexistent at this time either in the U.S. or worldwide. There is no borrowing and the Fed’s rate increase cannot and will not affect this. Only the expectation and anticipation of growth will
  • Big data indicates lowering unemployment in the U.S. and that is so. However, what is not measured is the number of people that are underemployed or who have taken themselves out of the search for employment. That is a drag on our economy and the “strengthening” economy the Fed provides as its reason for the increase is based on an illusory statistic
  • The purpose of the Fed is to try to periodically rebalance the economy by moving short term rates up or down. In recessionary times it would reduce rates to encourage spending, borrowing and investing to create employment. During expansionary times it would raise rates to restrain spending, borrowing, investing and job creation in order to hold back inflation. In the 2008/2009 financial crisis period it also started buying bonds and mortgages in an effort to keep rates down
  • Everything an organization with the influence of the Fed does causes some ripple effects – somewhere – and things have been affected by the Fed’s actions or inactions over the past six to seven years. We are certainly doing better than we were, and we are doing a lot better than Europe who did not have a Fed type of organization calling shots and interfering with the economy. However, there is not a clear acquiescence that the Fed’s actions contributed greatly to this and possibly the positive changes would have occurred anyway or would have occurred in spite of the Fed. The U.S. economy is stronger and has more self-activating mechanisms including the initiative of its people than the EU and in spite of the conflicts within
  • Congress, has a strong stable government able to act or not in the overall best interests of the people and economy

Long-term interest rates have been at record lows since 2008 because of economic malaise. We’ve made a lot of progress job-wise during this period, but markets, businesses and investors look ahead and what they see is not what the Fed sees. Hopefully things will change and we could look forward to substantial growth, but not right now. Because of this, the Fed is wrong. Actually, the Fed is in the wrong business. Let it stick to controlling short term rates to tweak employment and reacting to inflationary pressures, which is really their role.

One Comment leave one →
  1. 6hawthorne permalink
    July 11, 2017 7:12 am

    Hi Ed interesting blog bob

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