Just In Time for Christmas

Even if it were wrapped in shiny paper with a big red bow on it, virtually everyone would have guessed at this year’s Christmas present from the Federal Reserve Board.

For most of us, the rate hike will be the equivalent of coal in our stockings, but for the economists, analysts, stock pickers, pundits, talking heads and other assorted Fed groupies, the rate hike was essential, because it validates their existence.  After inaccurately predicting a rate hike throughout 2015, they finally got it right! 20151217_BAML1

The hike of 25 to 50 basis points in the federal funds rate is an insignificant increase (the Fed’s Board of Governors will raise the interest rate paid on reserves to 0.5% and the Federal Open Market Committee will offer a rate of 0.25% on reverse repurchase agreements), except that it represents the end of an era.  ZIRP, or zero-interest-rate policy, has now been replaced with ZIRP+ or maybe Near ZIRP, Almost ZIRP or A-Tad-Above ZIRP.  It’s still as close to ZIRP as you can get without being ZIRP.

Questions Raised

Regardless, after 84 months of ZIRP, it’s worth noting that interest rates have changed direction and are now heading up.  ZIRP was already old when this blog was started in January 2010.  Now what are we going to write about? 

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A Way Out for the Fed

The economy grew at a tepid rate of 1.5% during the third quarter.  More than 100 million Americans aren’t working.  And the inflation rate is near zero.

That’s after seven years of the most radical monetary policy in history, which was supposed to lower unemployment while boosting the inflation rate to 2%.  If you’re the Federal Reserve Board, do you:

  • Conclude that keeping interest rates near zero isn’t helping the economy and abandon that policy.
  • Keep doing what you’re doing, hoping things will change next year, so you can take credit for it.
  • Conclude that the economy is still a mess even after you bought a few trillion dollars’ worth of bonds, so maybe you need to buy more bonds.

The correct answer, at least last week, was b., as the Fed voted to continue its zero interest rate policy (ZIRP), “surprising no one,” as The Wall Street Journal noted.

That means the Fed will keep on zirping, at least until December, but more likely into 2016.

Subject to Interpretation

The Fed’s policy statement, which has changed about as much as Fed policy over the past seven years, was interpreted by many to imply that the Fed “might” increase interest rates by a whole 0.25% when it meets in December.

“Before the Fed released its policy statement Wednesday,” The Wall Street Journal reported, “traders in futures markets put about a 1-in-3 probability on a Fed rate increase this year; after the release, that probability rose to almost 1-in-2.”

In addition, nearly two-thirds of economists participating in The Wall Street Journal’s latest monthly survey believe the Fed will raise rates in December.  Of course, these ar

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No Animals Harmed in Drafting Fed Policy Statement

Thousands of years ago, Roman soothsayers would visit the oracles and interpret the entrails of slaughtered animals.  We haven’t advanced much since then.

Fortunately, no animals are slaughtered today, but many brain cells seem to die in the reading and interpretation of policy statements of the Federal Open Market Committee.  Like the soothsayers of old, today’s economists, journalists and pundits interpret the news and report it as fact – even though they generally haven’t a clue about what’s being said.  We’re not even sure the FOMC has a clue about what’s being said. Animal

The policy statements themselves are an anachronism.  In today’s world, most news is immediate.  By the time a newsworthy event ends, it’s been tweeted, blogged and reported on by anyone and everyone who is interested.

Yet the Fed issues policy statements on its Federal Open Market Committee meetings two months after the meetings take place.  Apparently, it takes the FOMC that long to agree on language that says nothing and can be interpreted however the reader would like it to be interpreted.

Many well-paid experts make a living off of these interpretations.  They will tell you, with certainty, that the Fed will definitely maybe raise interest rates sometime this year – or maybe next year – but they’re just guessing.

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