All Talk and No Action

For whatever reason, the world seems to hold its breath whenever the Fed meets, speaks or acts. Last week’s meeting was no exception. Quantitative easing (QE) was halted a year ago, but we’re still at an effective zero interest rate today.

The Fed says consumers are spending more and our unemployment rate is low. But aside from iPhones and health care, I’m not sure what people are spending their money on with zero wage growth.

New home sales have been on the rise but are still only a fraction of what they were before house prices started to melt down in 2005. And new homes sold for under $200,000 were at a record low for the month of September. The median new home price has risen to near $300,000, which is near a record high.

Of course, houses are an “asset” rather than an “expense” and not included in the Fed’s inflation calculations.

The Fed is still worried about deflationbut aside from falling energy prices, it’s hard to see what they’re worried about. Housing costs have skyrocketed, health care costs are quickly on the rise, and if you have kids in college you know education costs are going up sharply.

The Fed credits themselves for saving the world when we were on the brink of financial meltdown in 2008. Since Congress is and has been unable to be fiscally responsible for decades, the Fed is charged with not only stabilizing prices for goods and services but to also allow for maximum employment.

But while quantitative easing (QE) helped create a rising stock market, it did little to encourage companies to invest more capital, grow revenues or hire more workers. It also encouraged to borrow more and buy back their own stock to help juice their earnrnings.

So here we are, a year after the end of QE and the stock market is near all-time highs, short term interest rates are still yielding zero percent, wage growth is still non-existent and inflation is still below the Fed’s 2% target.

The Fed has been talking about normalizing rates, but hasn’t been able to do so because the economy is not cooperating. Their policy decisions have failed. They’re stuck.

What will they do in December? Probably talk about raising rates sometime in the future.

Lance Gaitan

Editor, Dent Digest Trader