Is the Federal Reserve’s “three arrows”bazooka” plan to revive the economy working? Yes, they do have some influence, but they won’t be able to have a significant impact on interest rates for months to come. But do they make sense?
The only way for the Federal Reserve to get real inflation and real value for money going into the real economy is to send interest rates to rock bottom. Unfortunately, we will not see a recovery until the Fed makes interest rates as negative as possible.
Right now, the Fed is using its power to cause long-term interest rates to peak, go down, and then return to their normal rates. If we look at the period from January 2020 to today, we see this trend. Interest rates peaked in December of that year and have been declining ever since.
But what does this really mean? The correct definition of real, inflation-adjusted interest rates are what they are now, and nothing more or less.
The trouble is that if interest rates fall below zero, the market considers them to be a real investment, while if they rise above zero, they are considered to be an artificial one. When markets become confused, the whole of the market behaves like an upside-down triangle.
So any one who buys into the triangle knows the triangle has broken out of its base and is floating around wildly, selling off “too low” but buying “too high”. So what happens next? Well, the price of stocks will rise or fall depending on what investors think the price will be at the end of the triangle.
One of the problems with such a market is that everybody is telling you that a market is going to do this or that, so the market “knows” how to behave. Then, when the stock market goes down, there is a big rush to sell, and this causes the price to drop even further. The sellers take their profits first, and so the price drops further.
But what happens when long-term deflation comes along? People don’t want to pay a lot of money for a long period of time. So as prices fall below their natural rate, the population takes notice, but the quality of life-capable is very poor.
When markets go down because people are scared, they create bad things. We see this happening around the world all the time, and it always works to help the many before the few.
There are several questions that investors should ask themselves when they are watching the market. One question would be, what effect will inflation have on stock values? Will people be paying outrageous amounts of money for these assets?
Another question to ask would be “Do the FOMC officials actually have any insight on this?” Because if they have any insight, they will know that markets go down all the time, and that’s what’s going to happen again. They will put up rates for scare tactics, and in the end they are hoping that everyone will lose out.
The bulls were at least partially right when they said that markets tend to run in circles. And we can expect to see this happen again soon.