By Mike Whitney and cross-posted from Counterpunch
After 6 full years of zero rates and extreme pump-priming that flushed more than $10 trillion dollars into global markets, the Federal Reserve decided that even the slightest uptick in its benchmark Fed Funds rate would trigger enough destructive volatility in emerging markets that it would be better to postpone the rate hike until some unknown date in the future.
The announcement that the FOMC planned to keep rates pegged at zero sent stocks briefly higher after which they fell sharply pushing global indices deep into the red.
The stunning decline in stock prices has Wall Street veterans worried that the Fed has lost its ability to move markets higher. Also, they are concerned that, by not raising rates, the Fed is indicating that the economy is much weaker than the data suggest and that even insignificant changes in the price of money could tip the economy back into recession. The combination of Central Bank impotence and slower global growth has manifest itself in a confused selloff which, as of this writing, has sent the Dow Jones down 212 points.
While it’s too early to say the Fed has lost control of the markets, it’s clear that negative interest rates no longer “pack the punch” they once did. It now appears that too much accommodative monetary policy can have the opposite effect than the one intended; that it can actually increase volatility, intensify investor jitters and, eventually, precipitate a correction.
As of Friday, none of this has really sunk into the public consciousness. Analysts are still trying to figure out ‘what went wrong’ without drawing the obvious conclusion that the Fed’s policies don’t always work the way they’re expected to work. Friday’s reversal illustrates the unintended consequences of excessive monetary intervention. Things can go haywire in a hurry.
Thursday’s FOMC statement is going to severely damage the Fed’s aura of invincibility. As time passes, more people are going to realize that the Fed is neither “all powerful” nor can it strengthen the economy and create widespread prosperity. It’s not that the Fed has lost its mojo. It’s that the Fed never had a mojo to begin with…