There is no place in a free society for an institution like the Federal Reserve Bank, an unelected group so powerful that their very words move markets, and thus have created a whole industry of Fed watchers, trying to figure out the Fed's next move. Thus the Fed, contrary to its protestations, is a force for economic chaos and not stability. The only thing it does well is protect its member banks from their own greed and incompetence by re-liquefying those banks to keep them from failing and taking down the whole economy with them. Hence, the “too big to fail” concept.
The article referenced at the beginning of this piece illustrates how the Fed creates uncertainty — and markets hate uncertainty.
The latest Federal Reserve meeting in Jackson Hole, Wyoming, is over and so far it would seem that the general investment world is not too happy about Janet Yellen’s statements as well as those of other Fed officials. In fact, many people are looking for some simple clarity as to what the central bank is actually planning.
Most importantly, investors want to know why the Fed is suddenly so adamant about continued interest rate hikes in 2016. Only a couple months ago, almost everyone, including alternative economic analysts, was arguing that the Fed will “never dare” to raise rates again so soon, and that there was no chance of a rate hike so close to the presidential elections.
I could go on for pages, but I'm going to stop here and let that sink in. The world of finance and investment is faced with the continuing project of forecasting what the Fed will do in order to plan investment strategies. “Don't fight the Fed,” as it's said. More ominously, investors spend inordinate amounts of time just trying to figure how what the Fed Chair is going to say.
When trying to understand the Fed, begin with the premise that its purpose is not to create a stable economy. It's not to promote growth. And it's not to foster “full employment” — whatever that means. It exists to serve its member banks by providing liquidity when needed, thus allowing those banks to take on much more risk for much greater profit margins than would otherwise be possible.
In effect, because of the Fed's backing, banks can leverage themselves way beyond any responsible measure — and they get to keep the profits when their bets work out, and pass the losses on to the Fed when they don't. Pretty sweet deal, huh?
Source: Personal Liberty