The Federal Reserve has lost some credibility today (IMO)
This is just my personal opinion. The Federal reserve has lost control of the leadership in the U. S. economy. The statement today was a non-statement. It makes me think of a deer in the headlights. They are out of ideas. Just like a condor trader sits on their hands when they have no idea what to do, the Fed has no idea what to do. Interest rates must go up, but they are kicking the can down the road. It seems that they will do anything to keep the stock market rally going.
Savers in the U.S. have been penalized for many years. Private equity lending has taken extreme risks for very low returns. Deflation seem to be a big threat to this economy even still. I certainly did not expect any rate hick today, but I felt pretty certain the language would say some form of a 2nd quarter 2015 token beginning of hikes.
The Fed has nothing to offer, being paralyzed between the QE wind down and the loss of asset prices when they raise the rates. They have lent trillions of dollars to major member banks at extremely low interest rates.
So, if the average person has loaned money at near zero interest rates, what happens to the note when rates rise. The lender will not be able to sell the note for anywhere near par. This is such a mismanagement of business by the Fed that if they were a publicly traded company they would be out of business tomorrow. And incompetence law suits would follow.
I really can’t believe that I’m living in this time when even someone as meager as I am can see the big picture.
Investors and traders hang on every word of the Fed but the words have no meaning. They know not what to do. Basically, they are saying that for 6 years the U.S. economy has been stagnant. Policy is going to “accommodating for a long time”.
Let me say what that means. The FED has a balance sheet that most people cannot even fathom. Its trillions of dollars of debt. This stuff has been sold all over the world. Think about it this way. What if you personally had a home equity line of credit secured by your home. Now let’s suppose that the interest rate on that debt is what we call “adjustable” or “variable”. In the United States, it’s not unusual that homeowners borrow money from lenders and the debt is secured by the collateral which is their home.
If the adjustable rates rise on your loan the interest payments rise. You get the picture. So if China has purchased a ton of 5 and 10 year notes from the Fed at, suppose, .75% interest, then they are not going to be too fond of paying that debt off right now. Why should they. They are enjoying very low cost financing. So the Feds want to start getting the principal back so they can re-lend it higher interest. Would you voluntarily pay off a low fixed interest loan, only to re-borrow at higher rate? I didn’t think so.
The only way the cheap loans are going to be retired is when the notes mature. Only then can the Fed lend more funds at higher rates. Plus, they also have to reduce the amount of sales of 2’s, 5’s and 10’s to move that balance sheet down to so sane amount.
Part 2 will be uploaded next week.