By Robrert Gore
For the record, SLL has no clue whether the Fed will or will not raise its federal funds target rate by twenty five basis points (one quarter of one percent) this week. Goldman Sachs is far more plugged into the Fed than SLL. They have said for some time that the Fed won’t raise the rate and SLL will go with that. Our lack of insight about the imminent move is exceeded only by our disinterest.
Supposedly a hike will unleash Armageddon, while standing pat will stoke a monster equity rally. We’ll see, but keep in mind financial markets’ long history of responses contrary to consensus predictions. The intense preoccupation on the decision is unhealthy, like old people whose sole topic of conversation is their ailments and medications. It betrays all sorts of misconceptions, chief of which is that the economy and financial markets are puppets dancing on strings controlled by the Fed puppeteer.
It is true that the during the eighty months the Fed has held the federal funds rate at zero and instituted three quantitative easings, the stock market has rallied and the economy has staged a feeble recovery. That does not amount to Quod Erat Demonstrandum (QED), the Latin phrase denoting that the proposition—Fed omnipotence—has been demonstrated. Fed easing failed to prevent market crashes and economic contraction after stock market tops in 1929, 2001, and 2007. Similarly, there have been numerous instances when the economy and stock market have done quite well in the face of constrictive Fed policies. The Fed’s interest rate moves usually follow, rather than lead, moves in the Treasury debt market. Whether that is because markets are anticipating the Fed or are actually leading it is a discussion best left for another day.
