The Federal Reserve: Damned if It Does, Damned if It Doesn’t

This article was written by Dickson Buchanan, SchiffGold Precious Metals Specialist. Any views expressed are his own and do not necessarily reflect the views of Peter Schiff or SchiffGold.

To hike or not to hike? That is the question.

Indeed, that has been the question for what seems like an eternity. But the question of whether or not the Federal Reserve is going to raise interest rates in December misses the point. The truth is, the Federal Reserve is damned if it does and damned if it doesn’t.

The “rate hike hype” began nearly three years ago. We’ve experienced almost 36 months of wishy washy, back and forth, pseudo-scientific attempts to decipher increasingly vague and non-conclusive Fed minutes as to when, how much, and what kind of rate hike we can expect.

You don’t have to be a professional economist to recognize the Fed policy as a stall tactic. Peter Schiff has called them out on this point time and again, showing that if they really wanted to raise rates, they would have done so by now.

Even some mainstream financial media outlets are starting to poke fun at what’s come to resemble a bad soap opera suspense drama. Earlier this month, Bloomberg Media featured a video titled, “Can we glean anything from the Fed’s Tea leaves?” You know things are bad when Bloomberg equates interpreting the central bank’s official minutes to tea leaf reading.

The bottom line is that the constant delays have called the Fed’s credibility into question. It’s like the boy who cried wolf. Every time the Fed goes out in front of the public and says, “This is not the month, but next month…” it takes yet another blow to its credibility.

This has to be an uncomfortable situation for the members of the Federal Reserve, especially if they really don’t want to raise rates – and they likely don’t. They certainly have plenty of reasons not to. As we explained earlier this year, the Fed must continue the pretense of being solvent to maintain its credibility as a financial institution. Just last week, Peter argued that the Fed won’t likely raise rates in December because it is focused on keeping a market bubble inflated instead of allowing the US to experience a painful, but necessary economic recovery. In fact, lackluster Black Friday sales may provide the perfect excuse to put off the “anticipated” December rate hike.

The reality behind all the rate hike hype is that the Fed is in a really difficult situation of its own making. It can’t win no matter that it does.

If the Fed raises rates, it will restore its credibility in the short-term. But then it risks squeezing itself financially, along with the rest of the world, due to the rising cost of borrowing. Such a decision would eventually create disastrous consequences when it comes to managing the United States’ debt – perhaps much sooner than even the Fed would anticipate.

However, if the Fed opts to forgo a hike and continue the seven year pattern of zero interest rates, it destroys its credibility in the eyes of the world. A zero interest policy is the equivalent of a no confidence vote in the economy, despite government attempts to convince us it is improving. Moreover, people are realizing that living in a world of zero bound interest is a financial nightmare, with savings and capital accumulation as difficult as it’s ever been.

At the end of the day, the Federal Reserve doesn’t have a “good” option. That is why the rate-hike hype is just that – hype. The Fed is damned if it does and damned if it doesn’t.

No matter what decision the central bank makes, it will not benefit itself or the economy.

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