For those who may not have heard, yesterday afternoon the Fed announced that it will leave its key interest rate at 0%!
This move came as a surprise to some and as no surprise to others. I count myself as being in the ‘not surprised’ camp as I expressed in an article from about one week ago titled, ‘Will The Fed Normalize Rates? Three Reasons Why It Won’t (Can’t)!‘.
But, for anyone who is involved in business of any kind, invests, is retired or may retire soon or is a saver, we are concerned with economic growth and with having confidence that the Federal Reserve is on the right track and is credible.
Yesterday’s decision, along with the fact that many felt a rate hike should have happened some time ago, brings both of those into question.
Below is a summary of the reasons why some felt the Fed should have hiked rates and then some the reasons why it did not.
After, I will present an analogy that I think is relevant as to why it is that Janet Yellen has had an inability to pull the trigger on interest rates.
Why Raise Rates?
While many may argue with the veracity of the economic recovery in the United States, if you go strictly by the reported numbers since the depths of the great recession and the beginning of Fed action (i.e. QE), there has been vast improvement.
What do I mean?
The U.S. economy: Why the Fed could have (should have) moved on rates…
- The oft-quoted unemployment rate currently stands at 5.1%, a level many would term full employment (Fed mandate #1),
- Inflation, that in limited quantities can be good, is hovering in the vicinity of the Fed target of 2% (Fed mandate #2 is monitoring and trying to keep inflation under control),
- Economic growth as defined by GDP grew at 3.7% last quarter although to be fair this number has trended all over the map.
Why the Fed didn’t move on rates (factors that are outside of its mandate)…
- Soft global emerging market economies which, while true, is outside of the Feds mandate. The Fed, however, may feel that raising rates would exacerbate this which would then spill over into our economy,
- U.S. dollar appreciation hurting U.S. exports,
- Weak global financial markets,
- Potential for deflation due to low oil prices and a strong dollar.
Janet Yellen: An Analogy
As a former trader and someone who taught younger traders how to trade, Janet Yellen’s inability to ‘pull the proverbial trigger’ on interest rates potentially appears to be a psychological barrier that many failed traders also faced.
As with trading, a decision to move or not move on interest rates comes down to the ability to interpret trends, understand momentum, understand risk and reward, factor in outside influences and then utilize leadership and decision making prowess to act.
Act, while understanding that all of the stars will never line-up and that when making a decision there is the risk of being wrong. And being wrong, while not the preferred outcome, is okay if the factors said that you were taking a well educated chance.
After all nothing is 100% guaranteed and, if you need such assurances, you will be paralyzed and unable to ever make a decision.
In the case of trading you would always want to follow the trend of the market and buy when others were selling and sell when there was an overwhelming desire by others to buy.
Let’s say the overall market was in an uptrend, a stock was in an uptrend, the stock had an influx of volume and then made a quick 1.5 point move higher.
Do you as a trader want to buy up 1.5 points or do you want to wait for the inevitable pullback (typically nothing goes straight up without a pullback and nothing goes straight down without a bounce).
The answer of course is that you want to wait for the pullback but, therein lies the problem that might spell the difference between a good trade, a great trade and a loss.
Some traders might impulsively need to be in a position and pay up 1.5 points leaving them little margin for error when it pulls back.
Others, however, are not only not impulsive but instead need to have 100% assurance that when they buy it is the exact right spot.
The problem is that there are no such assurances and that if you wait for confirmation that the pullback is over, it is likely too late and you will be paying up.
Trading, like making a decision or not making a decision on interest rates as the Federal Reserve Chair, takes an ability to analyze the data and an ability to lead and make a decision.
Janet Yellen, like that trader waiting for 100% assurance that the decision is right, is unable to do that.
And for the U.S. economy, unlike the one trade in the example above, the stakes couldn’t be higher.
One has to ask is the decision not to move rates is due to information that Janet Yellen has we are not privy to or does she need all the stars to line-up?
If that’s the case, we may be at 0% until the next president names a new Fed Chair!
Article by Michael Haltman, President of Hallmark Abstract Service in New York.Google+