Recent headlines are focusing on whether or not the Federal Reserve (Fed) will raise its key interest rate this year. If they raise rates, the markets may falter. If they don’t raise rates then they may lose credibility (if only!). The financial world is on edge, while most people shrug their shoulders and wonder why the Fed even matters.

Sadly, the fact that the average Joe doesn’t understand the Fed’s role in the US economy does not mean its role is minor. On the contrary, the Federal Reserve has brought untold economic destruction since its creation in the darkest recesses of bureaucratic hell. However, in the present environment ignorance may save Joe a lot of unnecessary angst. As they say, ignorance is bliss – at least in a relative sense.

Why the FED Matters

Some readers may not be familiar with the Fed. Others may only have a fading memory of an overhead projection from the tenth grade. For all of you, I’ll try and make the summary short. The Federal Reserve is the “bank” of the United States, controlling the amount of dollars circulating through the economy. In said capacity, it strongly influences interest rates on everything from credit cards to mortgages. Interest rates move in relation to the one rate the Federal Reserve directly influences: the Fed Funds Rate. So what the Fed does has little direct effect on prices in the economy. However, this interest rate effects the price of purchases made on credit. And in a credit-based economy (like the US), that includes just about everything.  So in another sense, what the Fed does indirectly effects every price in the economy. And in this sense, the Fed really does matter.

Lately, central bankers around the world have held press conferences to tell the media and investors what they don’t know; that is, whether they will raise the Fed Funds Rate. Why don’t they know what they are supposed to know? In one word: Keynes. Their confusion about the economy, the markets, and everything in between is evident. Firmly standing on the theories set forth by John Maynard Keynes, they believe spending drives economic growth. Whenever growth slows down, the solution is more spending: by individuals, companies, and (surprise!) the government. They continue faithfully believing this even as mountains of debt pile up while growth continues to slow down.

Leeches and leeching

If the economy is a sick patient (suffering from low growth), the Fed fancies itself the doctor and it’s policy tools the medicine. What we have then, is the attempt to cure a hemophiliac with leeches. Come to think of it, leeches are quite appropriate. Leeches suck blood out of their hosts, weakening the host by taking away a vital resource. The tools of the Fed distort the free market, misusing and ultimately destroying the “life blood” of the economy (i.e. money, time, and labor).

Why the FED Doesn’t Matter

Here’s the problem: central bankers actually think the leeches are helping. But as helpless as these bankers are to diagnose the US economy’s ailment, they are not so blind as to see that it isn’t actually improving. Keynesian orthodoxy says should be raising the federal fund rate as growth increases (i.e. removing the leeches as the patient improves). In actuality, though, no one expected rates to be this low for this long: low rates lead to booming economies, remember? Still, these faithful Keynesians can’t ignore the fact that their patient looks a little paler today than he did yesterday.

At the same time, bankers are afraid to remove the leeches for fear the patient’s status might get worse – weakening their credibility. So what is a faithful Keynesian to do? What any academic with lots of confidence in a defunct paradigm does: talk louder, do nothing, and hope everyone continues to take you seriously. Having said that, I can summarize all these policy speeches thus: “We might raise rates, and we might not.” Helpful, right?

Meanwhile, the central banker’s soft-core version of socialism has been creating asset bubbles across the board. As a result of this meddling, the global economy up for a significant correction. If they raise interest rates now, the markets will react like a drug addict without a fix. The stock market needs cheap money to continue grinding higher. But if they leave interest rates at near-zero, they won’t be able to lower the Fed Funds rate when the asset bubbles inevitably pop and we enter the next recession – which is fast approaching. Put another way: the turmoil ahead is baked in the cake. In this sense, the Fed really doesn’t matter.

Conclusion

Is there a recession coming? Yes. When? Probably soon. What can the Fed do about it? Nothing. So whether out of ignorance or awareness, we would encourage you to sit back and ignore the jawboning on the six o’clock news. Here at Plan Financial, we are positioning our portfolios to take advantage of the oncoming recession and the possible (or likely) emergence of negative rates. If you’d like more information, give us a call; we would be happy to discuss with you.

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