Wednesday, December 17, 2014

Yellen and the Markets

The Federal Reserve met today and released the awaited statement. There was no change in the language referring to "an extended period" of low interest rates. Actually they did change some things. See HERE
But did they really change anything?

During comments after the meeting by Janet Yellen, the chair of the Fed, the stock markets declined, along with gold. The question is of inflation. When, the market wishes to know, is the Fed going to "rein in" inflation. And all are quivering in fear of a raise.

Let me answer that question.

You all know the difficulty of "pushing on a string". Yes?
That has been the analogy of the Fed trying to stimulate an economy that was not raring to go. In other words you can't make people borrow and create money if they don't want to borrow, or the banks don't want to lend. The economy is not ready to pull it's weight yet.

Think of a team of horses at work. An archaic concept, I know. But you cannot control a team of horses unless they want to pull forward. You can't push on a string...

During her comments Yellen made a one sentence statement that summed it up for me. She said, to paraphrase, "myself and the committee want to wait to raise rates until we are sure we can continue to raise rates in a continuing fashion".  To me that means they want the economy and inflation to be pulling at the harness before they try to control or restrain the economy.
When did Volcker raise rates? What was inflation doing when that hero of capitalism raised rates to rein in inflation? Wasn't it like 7% inflation?
We got a long way to go. Buy gold and real assets.


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