The federal reserve Board finds itself back in a quandary of its own making. When Fed chair Janet Yellen pushed through an interest rate hike this past December, she confidently cited an “economy performing well and expected to continue to do so.”
The Fed set the stage for more rate hikes in 2016. But something went awry along the way – namely, the Fed's upbeat forecast.
Official pronouncements of optimism don't square with the economic realities now unfolding. Since the Fed's rate hike, warning signs of a looming recession have rapidly accumulated. Industrial production is slumping. Global bulk shipping rates are in the dumps. The number of people without full-time jobs is growing. Corporate earnings are weakening. The junk bond market is melting down, and the stock market appears to be following suit.
Most of these warning signs were flashing back when the Fed decided to hike. The stock market was still positively diverging from economic indicators, but now that the Dow Jones Industrial too is rolling over, the Fed is back-tracking on rate hikes.
The Fed's next move could be to cut rather than raise rates – perhaps even pushing them into negative territory as central banks in Europe and Japan have done.
The Fed Has a Remarkable Track Record of Failed Forecasts
Federal Reserve policymakers can be counted on to react to market developments, because that's all they can do. Time and again, they have shown that their forecasting models don't work. The Fed doesn't actually prevent financial crises from occurring. It just comes in after the fact to try to clean up the mess its loose money policies helped create – the 2008 financial crisis being the latest example.
Fed officials won't admit publicly that they're just making it up as they go. But that's the reality. As James Rickards explained in an interview with Mike Gleason, “I've spoken to Fed governors, I've spoken to Regional Reserve presidents, I've spoken to a lot of senior officials at the Federal Reserve, and insiders there. They don't know what they're doing. They won't say it publicly but they do say it privately.”
