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The Regressive Fed

Via Kessler Companies,

In a move that defines the word 'irony' better than the dictionary does, the Federal Reserve raised rates just five hours after their own Industrial Production series was released showing an almost certain entry into a US recession (see chart below).

The Federal Reserve's hidden role as banking lobbyist won out over their populist role as counter-cyclical policy provider and they raised rates for the wrong reasons, putting them in the US-1936 and Japan-2000 policy mistake club. Banks didn't waste any time in proving what the raise was for. Most big banks immediately raised their 'prime' borrowing rates by 0.25% yet, of course, they didn't raise what they pay on deposits. 

The press conference with Janet Yellen after the announcement had an almost comic tone as journalist after journalist asked a version of the same rhetorical question; how does raising rates help to raise inflation and GDP growth? Ms. Yellen filibustered her way through the answers by effectively saying that she sees all of the negatives, but that they do not matter because of 'blah'. Replace 'blah' with your choice of 'transitory', 'reasonable confidence', or 'reasonably close'. By raising rates, the FOMC has effectively substituted the ire of bankers for the ire of main street and for a Fed that constantly battles negative main street perceptions, this is regressive and disappointing.

It is important to point out that the Fed raising rates is probably better for our positions than had they not raised, but it doesn't mean it was the right thing to do. In the day after this raise, we note that markets are trading rationally for the first time in a long time. The Dollar is near a new high, Oil is at a new low, Stocks are lower, and Interest rates are lower. The FOMC's mistake may prove to be the catalyst bringing long-term rates much lower, but the loss of a predictable Fed is more profound.