Stocks react to FOMC minutes… Happy that profits protected, but unaware that Net Social Benefits will decrease
Today at 2 pm Eastern time, the minutes of the September FOMC meeting were made public. And the stock markets shot up like a rocket. The minutes basically show that the Fed is concerned about Europe and other overseas economies and the strong dollar.
Why would the stock market shoot up on bad news? The probability of the Fed maintaining the effective Fed nominal interest rate at the zero lower bound increases. Money is more likely to stay cheap for firms. So firms that are on the edge of financial trouble and vulnerable profits will, in essence, be rolled over, so that they can continue to do business. Also firms will be able to maintain profit rates since financial costs will stay lower.
Of course, a lower Fed rate longer into the future is good news to the stock market, but the net social benefits to society will decrease. Firms are being given the license to be less productive and less efficient. Eventually the lower net social benefits will weigh down upon the economy.
The stock markets are happy about the short-term protection of profits, but eventually, they will be unhappy about the economy growing weaker… such is life.
The stock market reaction today shows that business people prioritize short-term profits over long-term social benefits. So the economies of the world will continue to get weaker and weaker, as business embraces lower and lower standards of social efficiency.