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Fed Rate Increase Flimsy Way to Build Consumer Confidence

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Prior to the FOMC raising the Federal Funds Rate this week, the Atlanta Fed revised its estimate of Q1 GDP from 3.4% to 0.9%, an enormous downward revision that suggests Chairwoman Janet Yellen and FOMC authorities aren’t as data dependent as they claim. The serious lack of economic growth indicated by the downward revision should give the Fed pause, but that doesn’t seem to be the case, as Peter Schiff pointed out in his latest podcast.

“If anything, you’ve had a collapse in [economic] growth estimates since the last time the Fed met. Yet that collapse in GDP forecast has not done anything to alter the Fed’s path because they’ve ignored all of the data, and they raised interest rates yet again.”

The rate increase now brings the current target range to 0.75 -1.0%, a number so far from any market-set rate it’s still worthless for anyone looking to earn anything from their savings.

The Fed’s decision to raise rates is still another attempt to instill false hope into consumers that the economy is getting better. But more and more consumers are becoming aware of the reality of sluggish wages and an increase in prices.

“People are tapped out. People are not spending money because the economy is weak. Prices are rising, but their incomes are not,” Peter explained.

Peter also criticized Janet Yellen’s comments about shrinking the Fed’s balance sheet. When asked about it, Yellen stated it would begin winding down the balance sheet until the rate normalization process is “well underway.” When asked to clarify what the term meant, the Chairwoman wasn’t able to give specific levels of interest or a general timeline.

Beginning with the 2008 crisis, the Federal Reserve began quantitative easing, meaning it began purchasing large quantities of Treasury securities and US-backed mortgage securities. The buying frenzy expanded the Fed’s balance sheet from $900 billion to $4.5 trillion.

Yellen’s hesitancy to define a timeline or standard for “well underway” is another example of how the Fed keeps its data dependency murky enough to wiggle out of any attempt to hold it accountable. Because higher interest rates mean higher payments on the national debt and possible default on US loans, the Fed is understandably reluctant, but it can’t telecast that reluctance or motivation. Instead, it continues to feign interest in raising interest. Yellen claims she’s waiting for stronger economic data to give FOMC members confidence, but it’s consumer confidence that she’s actually hoping to create with too-little-too-late rate increases.

 

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