Is the Fed Losing Credibility?

I absolutely agree with Rodney. Central Bank or government involvement is the last thing we need in our efforts to revive the middle class. So I say the Fed should keep its nose out of our employment situation and focus more of its efforts on understanding its limitations. That is, it doesn’t have the power to beat economic forces that have been in action longer than they’ve been in business.

Harry and Rodney have been writing about the economic winter season we’re living through now long before I joined them eight years ago. And long before Ben Bernanke took over as Fed chair in 2006 and then when he began trying to fight deflation by printing money.

Under Bernanke’s reign, the Fed created $4 trillion over six years, yet wage growth remains stagnant at best. Inflation was negative for the month of December, well below the Fed’s 2% target for the year. And there’s been some job growth, but the quality of those jobs is questionable.

The reality is, the standard of living for the average consumer has been in decline for many years now, no thanks to the Fed.

While stock market participants have enjoyed the Fed’s practice of providing “crack” to the economy, savers and those counting on safe returns from interest rates (retirees) have suffered.

That’s nothing for the Fed to be proud of, in my opinion.

Last Tuesday and Wednesday, the Federal Open Market Committee (FOMC) held their regularly scheduled meeting to set monetary policy and agreed not to raise rates from zero to 0.25% on the federal funds rate.

The FOMC seems to believe the labor market has improved with strong job gains and a lower unemployment rate. They also believe that lower energy prices that are worrisome to inflation are temporary and that the inflation rate will gradually, over the medium term, rise to the 2% they are looking for.

In the meantime, the Fed’s asset purchases will remain the same. That is, they’ll maintain their policy of reinvesting principal payment of debt and rolling over maturing Treasury securities at auction. So, they’re not changing the money supply by selling off any current holdings.

And they’ve promised to be “patient” and look closely at the data and economic conditions that may warrant keeping the target federal funds rate low or below normal levels for a long time.

As far as I’m concerned, that tells me the Fed thinks there may be trouble ahead.

Following the Fed’s statement, the rate on the U.S. 30-year bond hit another all-time low of 2.29%. I’m not surprised. It’s obvious that no one believes that the Fed is going to raise rates any time soon!

Could the Fed already be losing credibility?

Will the equity bubble, the bond bubble and all of the other bubbles the Fed has helped to create finally burst?

To us, the Fed never really had any credibility to begin with, but I think others are now beginning to see that for themselves.

And we believe those bubbles must burst. There’s simply no other way.

I hope the Fed stands aside during the next crisis to force our elected officials to finally deal with taxes, spending and regulation in a meaningful way.

The bubbles need to burst, as Harry has said on many occasions! Our economy and markets need to correct, before they can recover.
Lance Gaitan
Lance

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Categories: Inflation

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.