Interest Rates: Why the Fed Made the Wrong Move

Interest-ratesBy deciding on Thursday not to raise interest rates, the Federal Reserve gave the world the wrong message.

How I interpreted the Fed’s lack of courage to act yesterday: “After keeping interest rates at zero for seven years, and having printed trillions of dollars in new currency out of thin air, the U.S. economy is still so weak, we can’t raise interest rates.”

Dear reader, ponder this for a moment: what would the message have been to the world if the Federal Reserve raised interest rates yesterday by a quarter percent?

I believe the message would have been this: “The Federal Reserve has succeeded in turning the U.S. economy around from the worst economic slowdown since the Great Depression to the point where the U.S. unemployment rate has moved down to five percent and the Federal Reserve is moving to now protect the economy from overheating.”

The courageous move to raise interest rates yesterday would have given investors and the world certainty and optimism, instead of uncertainty and just more fear. Look at the stock market this morning. As this issue goes to press, the market sell-off that started after the Fed’s announcement is continuing. Since when does the Federal Reserve say it’s not raising interest rates and the market falls? Something is very wrong here.

For months now I have written about how the Fed’s easy money policies have helped the rich, but not the poor who make up the majority of the population.

An interest rate hike of just a quarter point yesterday would have had no impact on 46.7 million Americans who live below the poverty line because they can’t get loans anyway. (Source: Income and Poverty in the United States: 2014 and Health Insurance Coverage in the United States: 2014, Census Bureau reports, September 16, 2015.)

A quarter-point rise in rates would not have hurt small business because banks are still making it very difficult for small businesses to get loans post-Credit Crisis.

But a one-quarter-point interest rate hike may have put a dent in the billions of dollars public companies are borrowing to buy back their own stocks—something that is totally unproductive for the economy.

And let’s face the facts: record-low interest rates are no longer helping the U.S. economy, as evidenced by the declining earnings of public companies.

For the third quarter of 2015, the S&P 500 companies are expected to report a decline of 4.4% in their corporate earnings from the same period a year ago.

The “smart” money, well aware of the weakening corporate earnings situation and the fact that low interest rates are no longer helping the U.S. economy, has been quietly, but quickly, exiting the stock market.

The chart below is of the National Association of Active Investment (NAAIM) Exposure Index. It tells us the percentage of U.S. stocks active managers hold in their portfolio.

NAAIM Exposure Index Chart

Chart courtesy of

As you can easily see from the chart, the percentage of stocks held by active stock managers has been falling like a rock. As it stands, just a little over one-quarter of their portfolios consist of U.S. stocks. Back in February, it was 100% U.S. stocks. Money managers have turned very pessimistic, very fast.

At the beginning of this year, I predicted the stock market would fall in 2015. At this point, the stock market has put in a huge top that may remain in force for years. Major U.S. companies have used billions of dollars of their shareholders’ money (and they borrowed billions more) to buy back their company’s stock at record-high prices—a terrible management decision, but a financial engineering move that propped up stock prices.

The economic house of cards the Federal Reserve built with its easy money policies (of keeping interest rates at historical lows for seven years and printing trillions of dollars in new paper money) is coming apart.