Federal Reserve Follies
Interest rate manipulation by the Federal Reserve consistently raises eyebrows and confuses observers. I often receive queries about this issue after each Fed meeting, and here is our answer:
Speculating what the Fed is going to do next is an exercise in futility.
The investment world and media loves the proverbial dog and pony show surrounding the Federal Reserve’s next policy decision, and the follow up speeches that amount to double-speak word salad. decision. In our reality at Markowski Investments, these decisions today will have little to no impact in our clients’ portfolios over the next five, ten, or even twenty years. We are not interested in predicting traders’ reactions or afternoon trading shifts because it simply does not serve our long-term objectives.
The current state of the Fed, characterized by our nation’s debt, interest rates, and the Fed’s monetization, strikes me as fruitless. Judy Shelton, a figure I deeply respect, recently proposed the need for an overhaul of the Fed’s monetary policy toolkit in the Wall Street Journal. She raised an important question:
What if the Fed’s anti-inflation strategy is not working?
Shelton challenged the widely accepted Phillips Curve principle, which proposes an inverse relationship between inflation and unemployment. Despite the repeated failures of this principle, the Fed still upholds it. Instead of pushing for higher unemployment to combat inflation, Shelton suggests that the economy should reduce inflation by increasing output and business capital investment. Not to mention some semblance of control over our nation’s obscene spending.
It is worth noting the FOMC’s primary monetary policy tool of paying interest on the $5.8 trillion cash accounts held by banks and funds at the Fed. This strategy has backfired, leading to the Fed’s interest expenses surpassing its interest income, and consequently accumulating losses.
We believe that Congress has permitted the Fed to become too powerful. Urgent reform of the Fed’s inconsistent interest rate policies is needed to mitigate further damage. The zero-interest rate policy, which failed between 2008 and 2015 needs to go away. All it does is create ridiculous boom/bust cycles. We believe that whenever money is mispriced (cheap) individuals and businesses do really stupid things.
The Fed needs to step back and let interest rates find their natural levels. We need clarity and predictability, not continuous turmoil. Be cognoscente that the Fed’s manipulations do not determine your long-term financial health. A robust financial strategy should be grounded in fundamental analysis, diligent planning, and a clear vision for the future.
