Dangerous TIMES - Fed All Quiet On Rates

Why the Federal Reserve is vague about interest rates

Federal Reserve Chair Janet Yellen can expect questions about interest rates and unemployment when the Fed wraps up its two-day meeting later today.

The Fed had promised to keep interest rates near zero, at least until unemployment hit 6.5 percent. Unemployment is currently at 6.7 percent and dropping (and the Fed has said it will likely look at other factors, too). Yellen is known as a proponent of transparency – but she’s expected to say as little as possible  about what those other factors might be. 

Here's why:

1. Players in the stock and bond markets always want to know exactly what the Fed will do next.  Even when the Fed can’t say for sure.  

"They’re trying to figure out 'What is the Fed telling me about, what are interest rates going to do?'” says Ann Owens, a Hamilton College economics professor and former Fed economist. "There’s a real incentive to figure that out before everybody else does. Because if you can do that, then you can make a profit."  

2. The Fed wants to give some guidance about what it’s thinking, without boxing itself in. Williams College economics professor Kenneth  Kuttner, who also worked for the Fed, says the Fed is like a college professor—with market players as grade-grubbing students.

"You hand out the grading rubric, and some kid says, 'Oh, look, I did X that’s on your grading rubric. Why didn’t I get an A?'" he says.  "You need to be specific enough that they know what to do in the paper, but vague enough that you can say, 'There are these other things I’m taking into account as well.'"

Because if those students get too unruly, it can cause trouble for the whole class.

One day, within the next five years, interest rates will rise in response, most likely, to a sudden surge in oil prices that will create an unprecedented spike in inflation. The US risks losing its status as the "global reserve currency." Hence by not doing so, it could place that status in peril. Major shortages in energy and material elements loom on the horizon that fuels this argument. 

Moreover, rates have been too low for too long. You can only defer the economic implications of limits to growth on a finite planet with crafty money ploys and tricks for so long. Reality bats last  And thus a reversion to the historical mean is in order on all fronts. Asset values are thus exposed to a historic correction - reality remains a cruel mistress! 

Platinum Wealth Partners
April 3, 2014

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