First, this blog is still not fully ready to go again but I just couldn’t help myself
today. Today the Fed raised interest rates as planned and the stock markets
went bananas. Does it make sense that the market would fall apart when the Fed
raised interest another smidge?
My answer is
no.
First, we
have known since the ice age that the Fed was going to raise rates in December.
If markets are so smart and forward leaning—why did the market swoon today?
Second, except
for banks no one really cares about the rate they raised—it is called The Federal
Funds Rate (FFR). Go to your local bank
and ask them to let you borrow money at the FFR. Be ready for roaring laughter.
Third, what
matters is what happens to interest rates that you, me, and your local steel
mill pay when they borrow. I hate to tell you this but most of those rates have
been falling lately – not rising. Yup, the FFR went up but critical
interest rates are low.
Fourth, we
might feel sorry for banks if their cost of funds (FFR) goes up but mortgage
rates do not go up and their revenues and profits decline. But they can’t
really do much about it since they have no real power today to raise rates. The
markets won’t allow it.
Fifth, what
matters to the stock market and to most of us is the strength of the economy.
The economy is strong now. I won’t go into all the data because you read about
it all the time. Output, employment, wages…they are all strong. Yes, there are
many risks to the growth but so far, they are risks and not realities.
Sixth what also
matters is inflation. We don’t want it to come roaring back. Will it? Hardly.
Check out energy markets lately. I bought gas yesterday. Wow! I love it. The
world economy – Germany, France, Japan, China – all these countries are experiencing
slower economic growth. This is not the kind of time when inflation soars. If inflation fails to soar – there is no reason for the Fed to raise interest rates anyway.
The markets
swooned. But there is nothing to swoon about. The Fed can want to raise rates
but in today’s global environment the December policy is about as important as
a snow shovel in Tucson in June.
Big Question -- will markets get smarter or dumber?
Hope you
have a Christmas and New Year.
Dear LSD. Glad yer bak from whatever you were doing . . . . good to read yer stuff . . . whilst yer absenze I dove deep to colder temps to avoid the disruption of CA fires, early snows in the Rockies, vehicle pile-ups in Chicago and I-95 due to black ice . . . all allegedly due to global warming . . . all too confounding and scratching my gills to unnerstand doesn’t help to rationalize the contradictions . . . way above my fishy-pay-scale-grade.
ReplyDeleteAh-h-h-h, to the solidarity of your question . . . “ . . . (sic) are/will the market-s (be) dumber or smarter . . ?” Hey, LSD, you know as do everybody that the “market-s” is/are not a prescient/intelligent doo-da. It cannot/do not/possess reasoning in the manner as do humans but are perceived the result of human choices buying/selling . . . . for the most part. What’s not apparent to many is the other part . . . that segment of market buy/selling made by algorithms . . . those man-made (er, person-made to be P-C) insidious codes that take over when humans can't deal with the volume and choices.
So, if you want to know if the market(s) will be smarter or dumber go have a chat with an algorithm. So much for AI, eh?
Dearest Chicken of the Sea,
DeleteI know Al G. Orythm personally and he is no Al Gore.
Aside from that I stick with my guns or at least my pea shooter.
Cheers,
LSD
Larry,
ReplyDeleteNormally I am with you but I have to side with the market today (maybe I am not too smart). First the Fed got themselves in hole when they over reacted back starting in 08. Now they feel they have to get back to normal asap though I don't know if they know what normal is. For the FFR not being of much importance a lot of folks do pay a lot of attention to it. Not sure where you get your data that the rates have be falling lately. Do you have a home equity loan? Many people do and their rates are not going down. Bond markets also have not liked the Fed much this year. Great for folks on a fixed income. I do agree with you that the strength of the economy is important. So why is the Fed trying to slow it down. Wages being up is bad. Must be. Inflation coming down the pike. Must be. The Fed must get super, confidential data that they rest of us don't see. If we do go into a recession late this year or next it at least won't be the fault of Congress or Donald, we call it the Powell effect and send snowblowers, not shovels to Tuscon.
Bob
Bob,
DeleteWhy do you blame Kathy for you posts? :-)
Too many rates to examine. I mostly look at broad indicators of rates like the 10 year and 30 year treasuries. They are clearly down.
Fed is not trying to slow the economy down. The Fed is trying to slow inflation down but we both know that will also impact growth. But as I astutely said in the post -- worldwide factors are going to put a lid on inflation and that will put downward pressure on interest rates. Fed is essentially pissing in the wind and we will all get a dousing. I've been moaning that the Fed should raise rates for years -- but now just ain't the right time. Say hi to Kathy.