During an appearance before the House
Financial Services Committee on 11/4/15, Federal Reserve Chairwoman Janet
Yellen commented as follows on the possibility of an interest rate hike:
"What
the committee has been expecting is that the economy will continue to grow at a
pace that is sufficient to generate further improvements in the labor market
and to return inflation to our 2 percent target over the medium term. If the incoming information supports that
expectation, then our statement indicates that December would be a live
possibility."
If, in
fact, an increase is in the offing, in which a key rate will be raised from its
record low of near zero, it will be the Fed’s first rate hike in nearly a
decade.
Despite
Ms. Yellen’s assurances, our economy is not vibrant, nor is the nation
experiencing “improvements in the labor market.” Jobs are disappearing, with an actual
unemployment rate now exceeding 20%. Traditional
sources of income for many Americans no longer exist. Interest on savings is gone; stock dividends are
meager; pensions are becoming a thing of the past. Many citizens are struggling to exist.
As for
the federal funds rate, it’s the U.S. national debt, now approaching $18
trillion, which is the elephant in the room.
If that rate is significantly increased, Uncle Sam finds himself awash
in payments which he cannot service without incurring further debt. This potential vicious cycle explains why the
rate has remained where it is.
At some
point political considerations become the dominate factor. If the administration must validate the
economy’s health, expect a token increase of perhaps ¼%, followed by media
ballyhoo as though a cataclysm shook the earth to its core. For a brief interval market indices will
vibrate violently, amidst irrational prognostications from countless
authorities and experts. Thereafter we’ll
return to business as usual.
This is
the sort of nonsense in which both the government and the investment world are
based. It’s summarized in Shakespeare’s Macbeth: “. . . a tale, told by an
idiot, full of sound and fury, signifying nothing.”
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If you enjoy this
weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly
Financial Newsletter, as well as my new book, The Road to Prosperity
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