Fed missteps and flip-flops this week tripped up multiple markets. After accidentally announcing their ammo is down to one last bullet against recession, can they be trusted to handle powerful weapons?
Given how the market is now trading on nothing but the Fed, it’s no surprise that it leaped up instantly in the middle of weak when the European Central Bank announced it may be raising its long-time inflation target from “just below 2%” up to 3% just as New York Fed President John Williams (a voting FOMC member) said the Fed should respond quickly to recessionary troubles with its own rate cuts.
Obviously, investors couldn’t care less about drilling into why the Fed should need to respond so quickly any deeper than Williams statement that it should do this because the Fed has limited resources left with which to do anything! The market wouldn’t have shot up if it had any depth of thought.
One might think that admission by the Fed would actually be concerning. One might think it would actually be alarming after Williams next words in which he estimated the new neutral rate for Fed funds would be somewhere around 0.5%, instead of the 2.25%-2.5% the Fed has currently targeted. In other words, setting interest one notch above zero in this reserve bank president’s view, will no longer have any stimulative effect. So, the Fed needs to drop to the zero bound immediately in order to fend off recessionary forces.
Read the rest here: The Great Recession