Less is More: Excessive Fed Actions Can Make Things Worse

   The Federal Reserve is boxed in. If it raises rates that will make the dollar go up too much, causing a global recession. If it raises rates that can trigger a domestic recession. If it tries cut rates to stimulate the economy that could set off another bogus stock market rally. If it tries more QE in the next recession that risks damaging the Fed’s credibility that they deviated from their goal of selling of QE-purchased assets, and it will make rates go up because of fear of inflation.
If it changes things dramatically that can disrupt plans of consumers and businesses thus tilting the economy towards a lesser degree of growth. QE is actually deflationary because it destroys retirement savings and consumers’ confidence about retirement. Also those people reasonably close to retirement will feel too poor to retire (due to low yields) and thus will “hoard” their present employment instead of retiring, thus creating a logjam in labor markets that hurts new workers who are hurt by the reluctance of older workers to retire.
The Fed is supposed to create an environment of stability for banks and the economy but if it encourages reckless bubble making (because investors are angry that yields are low) then this will result in bubble crashes which in turn necessitate a Fed-sponsored bailout.
The economy would be better served if the Fed acted to minimize its disruptions and surprises and instead simply stood ready as a lender of last resort to be used to prop up failing banks and insurance companies during a Lehman-style crisis.
Investors need independent financial advice about the risks that Fed central banking won’t work and may make things worse.

2018-11-27T13:06:09+00:00November 27th, 2018|mayflowercapital blog|Comments Off on Less is More: Excessive Fed Actions Can Make Things Worse

About the Author:

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Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years. Donald Martin’s 19 year career in lending prepared him for fixed income analysis, Securities analysis, and macro-economic analysis used for investing. Donald Martin founded Mayflower Capital in 1993 to provide independent financial advice and implementation of advice about loans. In 2005 Donald Martin changed the company’s mission to providing independent financial advice about investments and financial planning and stopped providing loan services. Donald Martin has a B.A. in Accounting and M.B.A. Finance, and has passed the rigorous CFP® exam and met the experience requirements needed to become a CERTIFIED FINANCIAL PLANNER™ professional. He has been employed in the financial services industries for 30 years and has been investing for his own account for 38 years.