What has been the real reason the Fed has been continuing to inject tons of liquidity into the markets? On paper, we know that they have two goals: one being keeping unemployment low and the other being to ensure steady low inflation. What’s interesting to note is that according to the reported numbers, we are now below 6% official unemployment and the inflation rate has been under control.
For the longest time, the Fed has been saying that interest rate would rise when unemployment dropped below 6.5 %. Today, the unemployment rate is 5.8% and interest rates will still be 0% for a considerable time. This contradiction makes me question the true motives of the Fed. If the two goals that the Fed is trying to achieve are met, then why are these policies still so loose?
My opinion is that the Fed is not just interested in the unemployment and inflation, but maximizing the wealth effect that people get when prices rise. Of course, this only tends to work out for those who own assets such as stocks, real estate, and commodities. Consider the graduating college student who can’t afford to move out of their parents house because everything costs too much. Does this wealth effect help this person or actually make it harder to become a success?
The Fed’s policy is a perpetuator of a widening wealth gap. This doesn’t mean that people are screwed, it just means that to be successful, you are going to have to work that much harder. This is a characteristic of a 3rd world country.
Even when the S&P 500 corrected 9% a month ago, the Fed immediately came out with reassurance in the markets that the rate hikes would be pushed back to what is now September 2015. If this holds to be true, this would be a seven-year-long period of historically low interest rates for an abnormal amount of time.
A more severe correction is inevitable at this point with the Fed continuing to inject the economy with stimulus. I anticipate 2015 to be a year of greater volatility as we’ve already seen 2014 be. During this time period, we can all watch and see if the Fed is in the unemployment business, inflation business, or wealth effect illusion.
Chief Editor at CrushTheStreet.com