Let’s talk about what the Federal Reserve has done right.
By raising interest rates for the fourth time this year and the ninth time in the current cycle, the Fed has left itself room to fix the economy when — if this happens — it suddenly becomes broken.
What do I mean?
Contrast what is happening in the European Union, where interest rates have not risen and the central bank is only now stopping its “quantitative easing” program that has kept rates extremely low.
The EU economy is weakening right now, and the European Central Bank cannot cut rates as a remedy for that situation.
But the Fed has lots of room to maneuver through bad economic times. At the very least, Jerome Powell and his crew can announce that it will cease interest rate increases.
After that, it can start lowering rates. Because Powell and his predecessor Janet Yellen have increased rates nine times, that means the Fed can lower rates by just as many times. The Fed can, if it needs to, bring rates all the way down to zero again.
Even the cessation of rate hikes would prove a potent salve for the financial markets and the economy. Cutting rates would send both over the moon.
There are some very foolish people who thought the Fed might stop rate hikes this week. Very, very foolish — if for no other reason than it would look as though the central bankers yielded to pressure from the White House.
What disappointed the markets the most was the fact that the Fed was more aggressive with regard to future rate hikes in the announcement put out after its two-day meeting.
The Fed is now pointing to two rate hikes next year, not the three it previously anticipated. And that would have been good news if it wasn’t for the fact that Wall Street got ahead of itself and started expecting just one hike.
That’s why stock prices collapsed Wednesday following the Fed announcement, going from a 350-point gain in the Dow Jones industrial average to a loss of that amount at the end of the day.
Here’s the important point to remember as far as the Fed is concerned: Powell and his gang are still “data dependent,” a phrase they have used in the past.
That means the Fed could raise rates more than two times next year if the economy suddenly picks up steam — although it probably won’t — and inflation rises.
Or it might stop boosting rates altogether or do just one hike if inflation declines and the economy weakens. Right now, that seems the better chance.
But the truth is, even the Fed doesn’t know what it will do next year. How could it? Despite all the Ph.D. economists and comprehensive computer models, the Fed really can’t foretell the economy’s future any better today than it could in the past.
