Wednesday, 16 December 2015

Why Today's Rate Decision Is Largely A Non-Event

Jitters are running down the Wall Street spine as the Fed allegedly is nearing its first rate hike since the summer of 2006. At least so it appeared up until yesterday. Based on the faulty economic doctrine worshiped by the monetary cranks housed by the Fed and fed by the U.S. taxpayer, and the demagogues having a career only because of its very existence, it would be a grave policy mistake to raise rates at this stage. More precisely, it would be a policy mistake to raise rates at any stage as the economic structures of the unsustainable kind it has diligently created would starve.

But the Fed has cornered itself and risk losing all credibility if it doesn't do as it preaches, i.e. raise interest rates today. That the Fed has any credibility left whatsoever is beyond my comprehension. The whole idea of a central bank running monetary inflationary policies should have no credibility at all from the onset based on sound economic reasoning and financial prudence. A central planning agency in charge of the money supply can chose to either maintain price inflation at a certain level well above zero percent or chose to ensure "financial stability" - but it cannot achieve both under any circumstances as the former contradicts the latter just as the latter contradicts the former. This faulty economic doctrine lies at the very heart of the financial bubbles and economic instability that have dominated the economy most recently since the mid 1990s. As long as this monetary "policy" is allowed to persist, not only in the U.S. but in all less than correctly labeled "civilised societies" around the world, economic weeds will be incentivised to sprout more consistently than any CPI target is actually achieved. 

Whether the Fed raises rates or not is largely a non-event for fundamental purposes for two main reasons. Firstly, if it does indeed raise rates it will be very incremental, perhaps even just ten basis points as a first move. This way, it would have "kept its word", but with minimum damage and maybe even positively surprise the financial markets at the same time. Secondly, if it raises rates by 25 basis points or any other number, it would soon have to lower them anyway in tandem with launching the next round of money printing. Do keep in mind that a range of interest rates and yields are long gone substantially higher than they were a year ago, especially junk bond yields. 

The stock market thrives on decreasing interest rates and increased monetary inflation. Both are now heading in the opposite direction or not moving at all and have done so for the past year. These developments help explain to a large extent why many broader indicies of the U.S. stock market have remained largely unchanged during the last twelve months. Nominal economic "fundamentals" are declining not only as a result of a relatively stable money supply growth rate, the expansion of which is the key driver of GDP growth, retail sales and other key economic indicators measured in monetary terms, but also as a result of the savings rate having been squashed for decades and especially since 2008. 

The Fed not raising the rate today will not offset the negative developments in the U.S. economy nor will it justify the ludicrous stock market prices and the still inflated earnings they're based on. Only the announcement of QE4 today could accomplish that feat, at least for a while. A small increase will on the other hand just lead to the Fed "having to" decrease the interest rate soon once again anyway. Today's benchmark rate decision is therefore largely a non-event for those of us that are not short term traders. 

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