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.
That doesn’t mean anything. Minutes are worthless mumble. The market is easily taken. Europe is likely going to expand its QE program, which means the Fed can’t do a thing about the dollar unless they try to match them. The so called “global growth slowdown” is overblown. I think it is a good thing and a better balance of US financial portfolio.
The global growth slowdown is a real possibility. The Fed is worried about it. Bankers are worried. Businesses are worried. The full details and data lurking within businesses has not made its way into the public eye. But behind the scenes, people are talking and learning that the economy is vulnerable.
The Fed cannot in no way convey a message of vulnerability in the US economy. The markets would freak… so that view has to be controlled. The Fed knows there are possibly serious troubles ahead.
The MAIN factor in asset prices is the estimate of how much the prices will be driven upwards by the amount of easy money from the fed bidding up asset prices. Estimates of the profitability of the underlying company are a secondary factor. Once you realize that, the repeated asset price bubbles are easily explained.
In America where there are lots of corporate take overs and equity firms that buy other firms and restructure them (usually to be more productive but in some case like Romney did to just destroy them and then get rich off the destruction) limit the low growth that allowing unproductive firms to have access to cheap finance creates? That and given that new firms and start ups also have access to this cheap finance and are more likely to need it then current forms means that there really are no net ill social side effects of keeping rates low while inflation is low.
That is not exactly true… Your logic says that interest rates should stay low forever. So why ever raise interest rates? It will just hinder business growth.
Are you in favor of keeping rates low forever? When do you think rates should increase?
From where I see it the usual reason to raise interest rates is because of too much demand which causes excess inflation (its arguable at what level excess inflation is). So you would raise interest rates when inflation is high and the high inflation is not caused by a supply shock.
I’m having a hard time connecting exactly how raising rates for everyone would result in low productive firms exiting and being replaced by more productive ones.
PS: I noticed that you made another blog post about this very topic; I’m not sure on the etiquette or if you’ll check back to this old post so I’ll re-post on the new post and also provide a link to this post..