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Go Ahead, Blame the Fed

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Go Ahead, Blame the Fed

500px-US-FederalReserveBoard-Seal.svgAlthough there is no shortage of problems, mistakes, and corruption to point out with various parts of the federal government and the do-nothing Congress, the real center of the equation is the Federal Reserve. As the unelected, privately-operated "fourth branch of government," the Fed is always an appropriate target for blame regarding our nation's ills. In fact, pick out your favorite issue facing the U.S. economy and our system of government and, almost invariably, you will find the Fed smack at the center of the controversy.

This is not some capricious piling-on against the Federal Reserve; it is simply the truth of the matter. You are completely justified to blame the Fed.

Blame the Fed

Have you ever heard the story about the company that tried to produce an automobile that would please every kind of consumer? With so many different tastes and customer desires to take into account, the project required the manufacturers to compromise and take the middle-ground on everything. In the end, they ended up with an ugly brown sedan that essentially appealed to no one.

Ugly brown sedan. Source: DailyTurismo.com Ugly brown sedan. Source: DailyTurismo.com

There is a lesson to be learned from this humorous example: When you try to please everyone all the time, you actually end up pleasing nobody. This is the unfortunate situation that the Federal Reserve finds itself in now.

In general, most criticisms of the Federal Reserve come from people who are considered to be "on the fringes" of the political spectrum. (Think: former U.S. Congressman Ron Paul.) Yet, in the two presidential cycles since the financial crisis, a larger and more diverse group of people have been joining in on the criticisms of the Fed—and deservedly so. At this point, even card-carrying liberals are critics of the Fed's decisions now! (This also says nothing of presidential candidate Bernie Sander's repeated bashing of the Fed's leadership over the past 20 years.) It's becoming increasingly clear that the central bank bears much of the blame for the uneven recovery of the economy.

The Fed is the Ugly Brown Sedan

Perhaps the biggest mistake by our country's central bank (among many) is its ill-fated attempt to be everything to everyone all of the time. First, the Fed wants to accommodate markets with unprecedented stimulus measures that have led to near-zero inflation; then, it wants to tighten monetary policy in order to keep inflation under wraps. It claims that the U.S. economy is insulated from international turmoil in one statement, and then cites global economic turmoil as part of the rationale for its decisions.

interest-ratesMany rightly blame the Fed for not sticking to the gameplan with its rate hike schedule. Although this is done in an attempt to cooperate with other central banks (like the ECB and BOJ), it simply adds confusion to the global markets. The lone bright spot of this reversal may be that it has caused the dollar to pull back, giving the central bank more room to raise interest rates.

It remains to be seen whether or not the Fed will finally get back on track with its stated policy goals. Above all else, the central monetary authority is supposed to uphold a dual mandate as defined by Congress: 1) maintain price stability; and 2) target full (maximum) employment.

By parsing the long-term trends in the data, Goldman Sachs now believes the Fed will begin to diverge from its global counterparts. Goldman sees the necessary improvements in the economic outlook in place for the Fed to resume its original pace of interest rate hikes. The bank is now calling for the Fed to raise the federal funds rate four times throughout 2016. This would likely be done in quarter-point increments (0.25% each) for an effective 1% increase to the benchmark interest rate by the end of the year.

CPI-goldman Graph courtesy of Goldman Sachs

Nonetheless, just about everyone agrees that the Federal Reserve has mishandled an admittedly difficult situation in its typical "do as I say, not as I do" fashion. So go ahead, blame the Fed. You'll almost always be right!

 

The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.

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