A Funny Thing Happened On The Way To Raising Rates

It wasn’t too long ago that the stock market was busy celebrating a “great” September jobs report.  There were 248k net new jobs created and the unemployment rate dropped to 5.9 percent.  Janet Yellen, Ben Bernanke and the rest of Washington D.C.’s central planners deemed it a great time to take a Keynesian victory lap, basking in the delusion that they now have proved you actually can print and borrow your way to prosperity.

And, because of their success, the Fed would be able to raise interest rates without any damage to the economy.

But while crossing the finish line they discovered they were on the wrong track.  U.S. stocks have dropped for the third consecutive week and have erased all the gains for the year. The market’s anxiety stems from the global economic slowdown (that includes the United States). Industrial commodity prices, most notably oil, are tumbling and sovereign debt yields are plunging—asset prices around the world have begun to collapse. 

Ever since the late 1980’s, the Fed has viewed itself as the savior for the stock market; this is affectionately referred to on Wall Street as the Fed put.  Like a fireman standing ready to put out a major fire brewing in the economy’s kitchen, the central bank has stood ready to bail out any of the markets bad behaviors—most of which were first derived from the Fed’s provision of artificially-low interest rates to begin with.

But, today’s Fed isn’t merely waiting for a fire to start, it is using a flame thrower to light the stove.  It has stopped relying strictly on overnight repos to manage short-term rates and providing liquidity on the margin; but instead has now put the responsibility of the worldwide economy squarely on its shoulders.   

This is why  former Fed Governor Laurence Meyer recently complained that too-low inflation, “is getting to be a real issue again,” With inflation at 1.5 percent according to the Fed’s preferred index, Meyer believes FOMC policy makers aren’t likely to raise interest rates, even if the economy approaches full employment—what Keynesians believe causes inflation.