The Fed's Desired Outcomes and Capital Markets

The Fed's desired outcomes are important to the capital markets, which play a role in setting interest rates.

Fed Chair Jerome Powell at news conference following FOMC meeting, Nov. 2. (AP Photo/Patrick ... [+] Semansky)Copyright 2022 The Associated Press. All rights reserved.
The Federal Reserve Chair Jerome Powell held a news conference on November 2 following the FOMC meeting. He said that the US economy is still recovering from the pandemic but remains vulnerable. The Fed will continue to provide support to the economy by keeping interest rates low and continuing its asset purchase program.

The Federal Reserve's decision to raise interest rates is a positive step that will help to ensure the long-term stability of the economy. Despite the initial stock market reaction, this move will ultimately be good for businesses and consumers alike.

So, now what?

The Federal Reserve's recent decision to raise interest rates is a positive step forward for the economy. By keeping rates low, the Fed has helped spur economic growth and create jobs. By raising rates, the Fed will help ensure that inflation remains in check, providing stability for businesses and consumers alike.

It is good news for savers and investors that after years of earning next to nothing, they are finally receiving meaningful interest income. This will help offset inflation's purchasing power erosion. However, it is important to keep in mind that a “real” (inflation-adjusted) rate is only coming if the Fed continues to allow interest rates to rise.

Why do you say "allowing" instead of "permitting"?

Many people have forgotten that the key job of setting the price of money (interest rates) is the capital (money) market - not the Federal Reserve. Through the extensive, ongoing bidding and offering process, agreed-upon interest rates are determined. The capital markets are the lifeblood of the economy, and it is essential that they function properly in order to ensure economic stability. The Federal Reserve has a vital role to play in ensuring that the capital markets function smoothly and efficiently.

The Federal Reserve's process for setting interest rates is inferior to that of the European Central Bank, according to a new report.

There are many benefits to key benefits, but especially important are the ones that help improve our quality of life.

  • It is important that both buyers and sellers receive a fair interest rate when they enter into a transaction. This ensures that the transaction is equitable for both parties involved.
  • In an efficient market, capital resources are allocated to the highest/best use. This means that money is used for the most productive and beneficial purposes, rather than being wasted on second-rate or selfish actions. This allocation of resources leads to greater prosperity and economic growth for everyone involved.
  • As someone who closely follows interest rates, I believe that it is important for rates to be set continually during market hours. This allows for a more accurate reflection of the current market conditions and helps to ensure that borrowers are getting the best possible rate.

In times of financial stress, the Federal Reserve can act to restore market conditions. The serious conditions in 2008 were such a time, so the Federal Reserve stepped in and pushed rates down to a historically low level of near-0%. By doing so, the Federal Reserve was able to stabilize the markets and avoid a complete collapse.

I believe that it is the Fed's job to set interest rates, and I think that near-0% should be the base rate. I rationalize this view by believing that the economy is not good enough. I think that this approach eventually became viewed as normal, and that it is a good thing.

It is clear that the Fed's decision to keep interest rates abnormally low for 14 years has had a profound and negative impact on savers, investors, and financial institutions. While it may be difficult to undo the damage that has been done, it is imperative that the Fed take steps to raise interest rates and restore confidence in the capital markets.

The Federal Reserve's decision to hold interest rates down is preventing the capital markets from fully functioning and reestablishing the long-missing market interest rate. Hopefully, the Fed will change course and allow the markets to operate freely.

The question that no one asks

There are a number of reasons why the Federal Reserve doesn't simply step away from setting the market interest rate. One reason is that the capital market is not always fully capable of setting the interest rate. Another reason is that the Fed has a dual mandate to promote both maximum employment and price stability.

The interest rate could potentially shoot up in the near future, according to experts. This could have major implications for the economy, and could make it more difficult for people to get loans and mortgages.

The Federal Reserve's decision to keep interest rates low is continuing to produce an easy money environment, which is not yet producing a true tightening. Instead, this is ridding the financial system of abnormally low rates that produce weak and selfish actions.

The Fed's policy of keeping interest rates low is not protecting us from a potential runaway interest rate. In the capital market, all participants can alter their bids and asks, plus jump in and pull out. The market is where all these forces coalesce, ensuring an understandable, fulsome interest rate level in real time.

Looking ahead, it's important to remember that the Fed's new 4% interest rate is still far below last year's near-0%. So while today's capital market rate would be higher, there is less distance to travel now. How far remains? We won't know that until the capital market is fully operating. At that point, the rate will depend on what terms investors and borrowers are jointly willing to accept.

The capital market interest rate is determined by the market participants, and not by the Federal Reserve. The market interest rate will be fair, equitable, and understandable. The Federal Reserve's 12-person decision making process is not transparent, and the interest rate set by the Federal Reserve may not be accepted by the market participants.

The Federal Reserve's role is to support the capital market, not replace it.

The role of the Federal Reserve in the US economy has been hotly debated for many years. Some believe that the Fed's role as the "lender of last resort" is essential to prevent a financial freeze or meltdown, as happened in 2008. Others believe that the Fed's intervention in the capital markets actually weakens the economy in the long run, and that it should instead be allowed to function more freely. Personally, I believe that capitalism is the driving force behind the strength of the US economy, and that the Federal Reserve should take a more hands-off approach in order to allow capitalism to flourish. If the capital markets become stressed, the Fed should provide support, but then quickly exit so that the markets can return to normal functioning.