Who’s Right – Commodities Or Fed?

I have been suggesting for quite some time that the Federal Reserve is stuck in a “liquidity trap” which makes it very difficult for monetary policy to be effective. More importantly, beginning in January of this year, I have suggested that the Fed is being forced to choose between the “lesser of two evils,” to wit:

The real concern for investors and individuals is the actual . There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get out of the “liquidity trap” they have gotten themselves into without cratering the economy, and the financial markets, in the process.

It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy. However, I also believe that the Fed understands that we are closer to the next economic recession than not.  For the Federal Reserve, the worst case scenario is being caught with rates at the “zero bound” when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed's perspective this might be the “lesser of two evils.”

I bring this up because Caroline Baum penned a similar bit of commentary for MarketWatch:

“What's the urgency with an economy chugging along at 2-something percent and low inflation? I suspect Fed officials are terrified of being caught with their pants down, in a manner of speaking. Should some unforeseen event come along to upend the economy, the Fed's arsenal would be dry. They'd like to put some space between their policy rate and zero.”

During Janet Yellen's most recent testimony to Congress, she has suggested that now is the time for the Federal Reserve to begin increasing interest rates, thereby tightening monetary policy, as the economy improves.

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