Remember that classic episode from the very first season of Seinfeld, when Jerry wants to "break up" with his obnoxious friend, Joel Horneck, but just can't bring himself to do it? Jerry can't stand the guy, but the thought of actually telling Joel he doesn't want to see him anymore is just so painful that even after he gets up enough nerve and delivers the blow over lunch at the diner – after which Joel, not unexpectedly, starts to blubber and carry on in public – Jerry immediately backs off and apologizes, further prolonging his agony.
I thought of that episode (I usually think in terms of old sitcom episodes, much to my wife's annoyance) after I read the Federal Reserve's policy statement on Wednesday. It once again chose to kick the can down the road (I really hate that metaphor, but it does apply here) and put off raising interest rates until sometime into the unknown future. Apparently the Fed just can't bear the thought of having the financial markets pull a Joel Horneck on it.
Not only did the Fed not remove the "considerable time" language from its statement, as many market participants were expecting. Instead, it added a brand new noncommittal phrase, saying that "it can be patient" before it begins to "normalize the stance of monetary policy," i.e., raise interest rates from its current zero to 0.25% target range.
Of course, both being "patient" and "considerable time" can mean anything, or nothing, at all. What they absolutely don't mean is "right now" or "very soon." At her news conference following the statement, Fed Chair Janet Yellen said a rate increase won't take place for "at least the next couple of meetings," meaning well into next year, and maybe not even then. Who knows?
Perhaps Mrs. Yellen and the six of her colleagues on the Federal Open Market Committee who voted for the statement (there were an unusually high three members who didn't go along) thought they were being cute in adding another set of evasive, ambiguous words that show that it still can't make up its collective mind.
Is the Fed simply indecisive? Incompetent? Or simply afraid of what the market reaction might be if it stops prolonging a policy that is no longer necessary?
The stock market's immediate reaction to the statement was predictable: prices jumped. And why shouldn't they, since the Fed is promising that it won't do anything to upset the party. Rates will stay at zero, so stocks will remain the only investment game in town.
Of course, by adhering to this non-policy, the Fed simply ensures that the asset bubble will grow bigger and bigger and the carnage messier and messier when it finally does get around to "normalizing" interest rates. Unless it believes that we can have 0% interest rates forever.
Remember what happened back in late 2005? The Fed and other government regulators, after years of either doing nothing or outright encouraging lenders to make "nontraditional" mortgages (i.e., no down payments, no income verification, no credit checks, no principal payments, etc.) finally told lenders that they had to start requiring consumers to prove that they could actually repay their loans. That in short order put an end to the easy-money housing boom from which we are still picking up the pieces.
The Fed is doing nothing different from what it did back then. Meaning it's doing nothing, and therefore once again making the situation even worse and risking a bigger problem.
The Fed had a golden opportunity Wednesday to give the markets at least some timeframe to help prepare for an interest rate rise, but it didn't even do that. Instead, it preferred to keep us in the dark. So when it finally does decide that the time is right, you can bet it will come as a major shock to the system, not unlike when it pulled the rug out from under the housing and mortgage markets way too late.
To its credit, the Fed didn't use the excuse of the turmoil in the oil market, which it called "transitory," or economic weakness in Europe to put off talk about raising rates. Plus it upgraded its assessment of the U.S. employment market and inflation. Which makes its non-statement so puzzling.
Other than a sharp selloff in stocks – which no doubt will also be "transitory" – it's hard to see what exactly the Fed is afraid of by raising rates, even a little bit.
If anything, an interest rate hike is likely to have an immediate stimulative effect on economic growth, not the opposite, as the Fed seems to fear. If corporations and consumers know that rates are going to start to rise soon, then they will buy that piece of equipment or that house before rates go even higher.
Too-low rates for too long have been holding back the recovery. What's the motivation to act if you think rates will always be this low?
At some point, we all have to confront our Joel Hornecks and do the sensible thing.
Visit back to read my article next week!
George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
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