To hike or not to hike? That is the question.
That has been the question for the Federal Reserve for what seems like an eternity. But the question of whether or not the Federal Reserve is going to raise interest rates this December misses the point. The hard truth is that the Federal Reserve is damned if it does (raise rates) and damned if it doesn’t.
The “rate hike hype” began nearly three years ago. We’ve experienced almost 36 months of wishy washy, back and forth, pseudo-scientific attempts to decipher increasingly vague and non-conclusive Fed minutes and “Fed-speak” as to when, how much, and what kind of rate hike we can expect.
You don’t have to be a PhD economist to recognize the Fed policy as a stall tactic. Peter Schiff has called them out on this point time and again, showing that if they really wanted to raise rates, they would have done so by now.
Even some financial media outlets are starting to poke fun at what’s come to resemble a bad soap opera-like suspense drama. Earlier this month, Bloomberg Media featured a video titled, “Can we glean anything from the Fed’s Tea leaves?” You know things are pretty bad when Bloomberg equates interpreting the central bank’s official minutes to tea leaf reading.
Does the Federal Reserve know what it’s doing?
These delays may be beginning to call the Fed’s credibility into question. It’s like the boy who cried wolf. Every time the Fed goes out in front of the public and says, “Not this month, but maybe next month…” it risks another blow to its credibility.
This has to be an uncomfortable situation for the members of the Federal Reserve board, especially if they don’t really want to raise rates. There are certainly plenty of good reasons why they wouldn’t want to. As we wrote earlier this year, the Fed must continue the pretense of being solvent to maintain its credibility as a financial institution. Just last week, Peter argued that the Fed won’t likely raise rates in December because it is focused on keeping a market bubble inflated instead of allowing the US to experience a painful, but necessary economic recovery. In fact, lackluster Black Friday sales may provide the perfect excuse to put off the much “anticipated” December rate hike.
Between a rock and a hard place
The reality behind all the rate hike hype is that the Fed is in a really difficult situation of its own making. It can’t win no matter that it does.
If the Fed raises rates, it will restore its credibility in the short-term. But then it risks squeezing itself financially, along with the rest of the world, due to its pushing for rising costs of borrowing. Such a decision could create disastrous consequences when it comes to managing the United States’ debt – perhaps much sooner than even the Fed would anticipate. Not to mention US corporate debt.
However, if the Fed opts to forgo a hike and continue the seven year pattern of zero interest rates, it risks a heavy blow to its credibility in the eyes of the world. Returning to a zero interest policy after all this talk about the burgeoning economic recovery, is the equivalent to a vote of no confidence in the economy and its recovery. Which one is it Ms. Yellen? (As if she, or anyone else for that matter could ever really answer such a question) Moreover, people are realizing the frustrations of living in a world of zero bound interest. Savings and capital accumulation is as difficult as it has ever been for large portions of the world.
At the end of the day, the Federal Reserve doesn’t have a “good” option. It has painted itself into a corner. That is why we think the rate-hike hype is just that – hype. The Fed is damned if it does and damned if it doesn’t. In other words, it’s just plain damned.
A version of this article was originally published here.