After 6 full years of zero rates and extreme pump-priming that flushed more than $10 trillion dollars into global markets, the Federal Reserve decided that even the slightest uptick in its benchmark Fed Funds rate would trigger enough destructive volatility in emerging markets that it would be better to postpone the rate hike until some unknown date in the future. The announcement that the FOMC planned to keep rates pegged at zero sent stocks briefly higher after which they fell sharply pushing global indices deep into the red.
The stunning decline in stock prices has Wall Street veterans worried that the Fed has lost its ability to move markets higher. Also, they are concerned that, by not raising rates, the Fed is indicating that the economy is much weaker than the data suggest and that even insignificant changes in the price of money could tip the economy back into recession. The combination of Central Bank impotence and slower global growth has manifest itself in a confused selloff which, as of this writing, has sent the Dow Jones down 212 points.
While it’s too early to say the Fed has lost control of the markets, it’s clear that negative interest rates no longer “pack the punch” they once did. It now appears that too much accommodative monetary policy can have the opposite effect than the one intended; that it can actually increase volatility, intensify investor jitters and, eventually, precipitate a correction. As of Friday, none of this has really sunk into the public consciousness. Analysts are still trying to figure out ‘what went wrong’ without drawing the obvious conclusion that the Fed’s policies don’t always work the way they’re expected to work. Friday’s reversal illustrates the unintended consequences of excessive monetary intervention. Things can go haywire in a hurry.
Thursday’s FOMC statement is going to severely damage the Fed’s aura of invincibility. As time passes, more people are going to realize that the Fed is neither “all powerful” nor can it strengthen the economy and create widespread prosperity. It’s not that the Fed has lost its mojo. It’s that the Fed never had a mojo to begin with. Monetary policy is just not the right tool for fixing the economy, in fact, the allure of easy money has just paved the way to another giant asset bubble that will end in disaster. Been there, done that.
The volatility we see in the markets now, is due entirely to the Fed’s massive liquidity injections which have created stock and bond prices that are disconnected from fundamentals. The Fed believes it can sustain those artificial prices with more easy money, but investors are no longer so sure, mainly because there are other factors at play that are beyond the Fed’s ability to control, like foreign direct investment, a persistent selloff in US Treasuries (Quantitative Tightening), and the vulnerable US Dollar which will be severely battered by the FOMC’s decision. If it was just a matter of cranking up the printing presses and showering Wall Street with more liquidity, then the Fed might be able to get away with it. But it’s not that simple. The global financial system is intricately interwoven. A sovereign default in the emerging markets can quickly implode counterparties in the US sending markets off a cliff and setting the stage for another financial crisis.
The world needs to wean itself off its addiction to cheap money and return to the pragmatic policies of the past. Another round of fiscal stimulus would be a good place to start. That would put money in the hands of the people who would spend it fast and get the economy growing again. Isn’t that the point?
Quantitative Easing for working people is an idea whose time has come. It involves increasing the budget deficits to mainline cash directly into the economy through infrastructure projects, jobs programs, expanded entitlement benefits, and increasing the federal workforce. All of these put money where it needs to be; circulating in the real economy, generating activity, stimulating investment, and spurring growth. That’s the ticket, baby!
Are we really going to wait until the Fed’s fanatical monetary policies blow up the system again?
Hopefully not. It’s time for Congress to step up to the plate, reassert its control over the economy, and spend whatever the hell it takes to get the economy back on track.
MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].