Investors and analysts believe the Fed is the most powerful player in global markets that can stop inflation, stimulate economic growth, manage unemployment and generally direct the U.S. economy.
There is only one issue with this belief. The Fed members can’t do any of those things and have even less idea about what they are actually talking about. They do put on a good show, maintain an aura of mystery and the media play along either because they don’t know any better or just because they have to write about something. Everyday investors listen to the financial news and react on it.
The truth is the Fed is more confused and even more confusing to investors. So, what was the Fed actually saying according to their minutes of the Fed’s meeting on July 27:
– Some Fed officials said they want to raise interest rates by at least 0.50% in September. With pther words a 0.75% rate hike is still a possibility.
– Other officials said, that “it likely would become appropriate at some point to slow the pace of policy rate increases.” So, what is the pace? 0.75% or 50%? And does this mean a rate hike of 0.75% or “only” 0.50% and what is the definition of “at some point”?
– Other officials said that once policy reached a “sufficiently restrictive level”, they would like to “maintain that level for some time.”
– The “master” himself, Fed Chief Jay Powell said the July 0.75% rate increase was “unusually large” but would not take another 0.75% rate hike off the table. He also said that rates could rise “by another percentage point through December.”
I guess, you got it, right? Since there are 3 meetings left this year, that implies rate hikes of 0.50%, 0.25% and 0.25% at the next three meetings, if interest goes up by another 1% until the end of the year. But what if rates increase by 0.75 in the next meeting? Will we only see another 0.25 hike in the next 2 meetings?. So, according to the Fed minutes, rate hikes could be 0.75%, 0.50%, 0.25%, or simply maintained at an undefined “restrictive level” in the future, whatever that means.
Let me solve that puzzle for you: The Fed has no idea what they’re doing! Investors might as well toss a coin when it comes to forecasting. But at the end, all this doesn’t really matter. Only real economic growth, productivity, inflation, supply chain dysfunction, inventories and a growing global liquidity crisis counts. The Fed doesn’t know how to fix any of those problems. But they are good at making you believe they can and especially at making things worse.
Sven Franssen