Fed's Illusion of Control
By Daily Bell Staff - November 24, 2015

Fed to hike at every meeting in 2017 … RBC chief economist Tom Porcelli forecasts … Markets are indicating about a 75 per cent chance of a US rate increase next month, the first in almost a decade. An interest rate increase by the United States Federal Reserve on December 16 is almost a "foregone conclusion" and the central bank looks set to lift rates at every second meeting in 2016, and then at every meeting in 2017, as inflation makes a startling return. That's the view of Tom Porcelli, the chief US economist at RBC Capital Markets. A combination of real, top-line, economic growth of about 3 per cent, an unemployment rate falling towards 4 per cent and rising inflation "should embolden the Fed to tighten at every other meeting in 2016," he said, meaning the Fed funds rate would finish next year at 1.5 per cent. – Sydney Morning Herald

Dominant Social Theme: Now the Fed will let loose. Goodbye haters!

Free-Market Analysis: Will the Fed really hike? Savvy market observers have maintained that the Fed is trapped due to the enormous size of the US national debt. It can't hike too hard or too fast. Perhaps it can't hike at all.

This is why we've been pointing out that it is preferable for the Fed to "jawbone" the economy. In other words, Fed officials travel out into the world with the words "rate hike" on their lips. But the hike never comes. It is telegraphed but not delivered. The idea is that by talking about it, Fed officials can influence markets without actually having to do anything.

One can make the argument that this has been the strategy throughout 2015. Will it also be the strategy in 2016? Theoretically, the Fed can go on mumbling about rate hikes without delivering any for as long as it wants. It has the power to do that.

But the public pressure is increasing on the Fed. Ralph Nader, on behalf of a "group of humble savers," just wrote a letter to the Fed that was answered by no less than Janet Yellen herself. Nader complained about low rates stealing the income of people on fixed budgets. Yellen replied that low rates engineered by the Fed had helped stabilize and were now expanding the US economy.

Tom Porcelli, as we can see from the article excerpted above, does not believe that the Fed will continue to "jawbone" rates. He expects aggressive hiking in 2016. Yet we believe that the Fed knows that there is no real recovery.

What we have here is a kind of shadow play. The Fed presents inaccurate numbers that show the economy is growing. At the same time, the Fed – and its appointed helpers – put out the word that a hike is coming that never comes.

We are lost in Plato's cave. The shadows on the wall foretell a reality that never takes place. An October post at quasi-libertarian Washington's Blog – "The Federal Reserve: Illusion of Understanding, Illusion of Control" – expresses this "alternative reality" …

From the article:

The foundation of the illusion of understanding is data–Big Data. That the Fed has no idea of how the real economy actually functions is painfully apparent. But the state's vast flood of data, neatly organized into slop-troughs that suggest precision, creates a very compelling illusion of understanding: media shills go to absurd lengths to treat bogus or marginal data as the equivalent of the tablets brought down by Moses.

Sorry, Corporate Media: the unemployment rate and the official rate of inflation are not real. They are illusions rigged to lull the masses and enrapture the simulacrum experts living high on the hog in academia, NGOs (non-governmental organizations) and think-tanks.

… Even more tragicomic, the spokespeople tasked with presenting this failure to the Great Unwashed are forced to speak gobbledigook that borders on the psychotic if taken at face value. For example, Janus Yellen must claim she is planning to raise interest rates while also proclaiming that she's keeping rates at zero for the indefinite future.

This is an accurate description of what's going on. Central banks are not "real" institutions in the sense that they can accomplish their putative goals. We've often pointed out that central banks are facades. There are plenty of justifications built around them. The trouble is that none of these justifications stand up to scrutiny.

And as we've often pointed out, the money that central banks produce has poured out into the world in its trillions and corrupted every part of the Western conversation in a truly unprecedented way.

The corruption is conveyed by what we call memes. These are sociopolitical and economic falsities intended to further cement the control of the shadowy forces that stand behind central banking and gain from the control that money printing engenders.

Central banks do nothing useful, do they? They fix prices and create unexpected and unacceptable outcomes. Usually central banks tend to keep interest rates too low for too long, thus creating destructive economic bubbles. Occasionally, the same facilities will hike rates, usually overshooting and paralyzing economic activity.

It is entirely reasonable to argue that free markets themselves should provide price discovery for the value and volume of money. That this obvious point is not argued emphatically in the mainstream media is further testimony to the corruption of modern society.

Instead, we get endless discourses about how and when central banks will do something – and whether the policies will prove correct. They cannot prove correct. There is no way central bank policy makers can guess the future by using backwards-looking data.

Whatever Yellen does now will likely be wrong – just as what she did before was wrong. Just as what she will do next year (if she is still Fed head) will also be wrong. The most likely assumption, as we have remarked numerous times now, is that the Fed will go along with other central banks around the world – banks that are loosening, not tightening.

This is a logical perspective, in our view. We would be very surprised if the Fed hikes aggressively next year. Instead the jawboning will continue as the Fed tries to convince us that it has adopted a tightening policy. In fact, be alert for covert loosening. We agree with Peter Schiff on this issue. The Fed will say one thing and do another.

We do expect a significant market event at some point, but we are on record as guessing this likely won't happen until the fourth quarter or so of 2016. We seem to have been correct so far and the Wall Street Party we've discussed in the past may well extend until that date – or (who knows?) even further.

After Thoughts

If so, there are plenty of opportunities in various sectors, and especially in cannabis – a sector that will surely continue to expand aggressively as legalization itself continues to expand.