Wednesday, January 25, 2012

Fed Failure

Today at 12:30 pm the Fed announced that it expected short term interest rates to stay near zero for the next two years.

Very low short term interest rates are always associated with weak economic activity. So the Fed is telling us that it expects to fail. It has announced that it believes all of its efforts during the past two years to stimulate the economy will come to naught.

Of course the Fed may be wrong about this. Indeed, its economic forecasting record is no better than anyone else's despite the enormous resources it devotes to such activity. But the sad thing is that the US central bank seems content to fail. I don't get it.

8 comments:

Kishore said...

Carl,

It has been obvious for at least over two years that the US Central Bank's market manipulation will, eventually, not only come to naught but has been utterly foolish. The assumption that you can print or borrow your way to increased economic activity or prosperity, has always been proven false.

The US Central Bank's actions have been utterly destructive for a free stock market. Just look at the current volume!

Congratulations for trying to "get it". I hope we will all eventually realize the truth!

I wish there were more leaders like Ron Paul who can speak out what is good for the USA.

Incidentally, I have totally switched off the "wallstream" - misnomered as mainstream - media.

T said...

I agree completely. Furthermore, since the main time horizon of monetary policy is around two years the fed is basically saying that rates will be close to zero for the forseeable future. And as you say, they are content with that... Say hello to Japan and the lost decade.

AD said...

I think this paradox leads to the natural conclusion that they should do more.

Why aren't they doing it, even if they know they should?

My answer is because they are paying too much attention to what the public opinion believes. Thus, it would be a thing of courage to do much more (say expand the balance sheet by 2 trillion). And an act of courage is much more easily done by a single person than by a group voting on a consensus every time.

ARJ said...

Fed apparently have developed a bad habit to trade the market. It's now a big hedge fund over trading on daily base.

Question for you is that you still stick to your road map, or a short term pull back has to be postponed, and why?

Overbought w/--divigency, but bulls still very strong w/Fed on the back.

Graph1159 said...

I don't get it either, especially given that the stock market has almost retraced the entire 2011 crash, and the trend in employment has been higher over the past six months. The U.S. recession frenzy has subsided dramatically, so why does the Fed feel such need to assure the market that interest rates will stay low for so long?

Win said...

Graph1159,
You don't see the data the Fed sees, at least not for another month. So if the Fed is saying that interest rates need to stay at these levels through 2014, you should assume that they see something pretty scary.

Carl, the Fed will do something, but in a democracy, they have to wait for the political consensus to come around. When the governor of Texas is calling for Bernanke to be shot (and is being widely applauded for it), when the most popular candidate for the Republican nomination wants to abolish the Fed, it is not entirely judicious to attempt QE 3. For now, at least, the nutters do have a voice, and a say. And I think you do get it.

sandy allred said...

In 1913 an ounce of gold dust would get you $16 at the assayer's office. Today it will get you $1,600. The FED has done a wonderful job providing us with sound money, haven't they?

Great Unwashed said...

I think the answer is very simple: it's about the debt. The Fed's hands are tied, because any rise in rates will mean a large increase in debt servicing costs and an acceleration of the deficit. I think Bernanke is hoping massive growth comes first before he raises rates again.