So the Open Market Committee of the Federal Reserve Bank of the United States raised short term interest rates from zero to twenty-five basis points. The Fed raising rates was long expected. The question is, why did they do so? Was inflation a problem? I think not.
The Fed raised rates because the cacophony of screams telling to do so became too much to bear.Most of the financial pundits knew they had waiting too long.This is the wrong reason to make a move.
Don’t get me wrong, I think the Fed should have raised a long time ago. Seven years at zero rates is just wrong, especially as they inflated their balance sheet to five trillion dollars. All this prolonged period of accommodation has done is reduce savings for the middle class and further enrich those with assets in the securities markets. The free money had to be realized somewhere and it was realized in overbought equity and bonds, where those with the expertise and money to take advantage certainly did. Sure income inequality is a problem, but the Federal Reserve keeping rates at zero had a lot to do with it. They thought they were helping out the Obama administration by keeping rates at zero and allowing U.S. debt to balloon to $20 trillion. Hey free money is for everyone; the government should be able to take advantage as well, right?
The problem is that when the Fed thinks they can ‘manage’ the economy, the result turns out just like it did in the Soviet Union—the economy doesn’t develop like it normally would, capital is misallocated and bubbles form, which can be disastrous down the road. Or the economy just doesn’t grow, or grows very slowly. The U.S. economy has not been a ‘free’ economy for some time now. The Greenspan Put was a great example of that. For someone who preached of Randian principles and deregulation, coming to the rescue every time the market hiccuped did more damage than good. Moral hazard is alive and well in the United States.
The Fed should have raised a year ago, when the economy was booming due to the shale oil revolution in North America. This was have put some more ammunition back in their quiver. Now they have only 25 beeps. The cupboard is bare. They can’t grow the balance sheet too much more, and they can’t reduce rates.
Unfortunately, the American economy could very well be slowing into 2016. The oil boom has bust, which was driving the U.S. economic expansion, in spite of all the government induced headwinds. Oil will most likely stay below $50 a barrel for quite some time. China is slowing, which has been the other great economic engine of the world. Europe has massive problems. We may be in for a good old global recession in the near future.
And this is the time the Fed decides to raise rates. Of course, they said they may not raise further if the economy stalls. I think they should get interest rates back to a normal range no matter what. Then, the economy will act to correct imbalances but we will be much healthier going forward. If we don’t allow this process to happen, the bubbles will keep getting bigger and bigger, as they did under Greenspan and Bernanke. When they pop, the consequences to Mom and Pop on Main Street will be that much more severe. The last two have been pretty bad, the internet and housing bubbles. The great depression from the great free money bubble may be impossible to recover from.
L. Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to many media outlets and is a foreign correspondent for Newsmax TV. LToddWood.com