The Fed Done Me Wrong!

CNN released a story Wednesday morning (9/23/15) entitled “The Sneaky Way that the Fed May Be Hurting Stocks.” Now there’s an unbiased piece of reporting. First the word ‘may’ is used to soften their bold claim, and second the use of the word ‘sneaky’ is a polemic that is meant to get your attention (and goat!).

The Federal Reserve sets financial policy for the nation on a macro economic basis. It is for all banks, all businesses, and all citizens. The policies also speak to massive markets for commodities, jobs, wages and salaries, and interest rates. Well, actually, interest rates is the mechanism that affects all the other elements of the economy.

The power of policy is what government does best. That is when the government is guided by science, math and deep, deep understanding of the interconnected issues. Then and only then can decisions be made that are right for the moment and the circumstances.

There are those who argue this stance. But then upon closer inspection the arguers would be people who have an ax to grind: banks who want higher interest rates for return on their investments, and a healthy spread between what interest rates they earn with those interest rates they pay. The greater the spread between these two, the stronger the banks’ earnings.

Same with companies. Those with competitive edge in their respective markets can make a killing if interest rates rise. Investors also win if interest rates boost their earnings from their retirement portfolios.

But Jack Welch, retired Chair/CEO/President of General Electric, has it right. The key measure interest rates are used to battle is inflation. Strong inflationary pressures damage the economy. Higher interest rates dampen demand, prices and thus inflationary pressures.

As I’ve written in this space before, higher interest rates are used to parse out investment funds for investment and lending. If those funds are scarce, interest rates rise. Such is not the case today. At last count a conservative estimate of excess liquid cash is $5 trillion. This means there is plenty of cash available to borrow, to invest and to buy other companies (competitors!). The latter is what the cash is currently being used for. Very little investment is being made. If it were, the liquid cash tally would fall to much lower levels and interest rates would naturally rise.

I suggest the Fed do the right thing and keep interest rates low until and unless inflation rears its ugly head again! Meanwhile, people with cash reserves, should use them to invest in new infrastructure, new jobs, new technology and new training efforts of underemployed people to learn higher level skills needed in today’s industrial environment. Then we might find the economy overheating and experiencing inflationary pressure.

That is not today’s condition so the Federal Reserve continues correctly to keep interest rates low.

For those who disagree, go back to Economics 101 and 102. Those courses will teach you the differences between macro economics and micro economics. Most people view the world through the lenses of micro economics. Hence the confusion. The Fed must operate within the strictures of macro economics.

Thank you very much for your time and understanding!

September 28, 2015