Wednesday could be a big day for investors. Or maybe not. But the focus in the Wall Street world will be on the meeting of the Federal Reserve Open Market Committee.
This group of seven members of the Fed’s board of governors meets eight times a year to look at the economy and make decisions on interest rates. It’s a two-day meeting and, in anticipation, investors often get nervous.
For almost two years, the Fed has kept the discount rate low – very low – to ease the economy out of recession. The discount rate is the interest rate that banks charge one another on what are known as overnight loans. It’s a short-term rate, but it can affect other rates and, indeed, the entire economy.
Ben Bernanke, the outgoing chairman of the Fed, has said that it will not consider raising rates until unemployment falls below 6.5 percent. But Bernanke, and other members of the Fed, may be having second thoughts about the target jobless rate for putting on the brakes.
The Fed slows down the economy by making “overnight” bank loans more expensive, and therefore, a drag on economic activity. So why would Fed officials want to slow things down?
If we had to choose one word that has been the Fed’s focus for many years, it’s inflation. Inflation usually goes up along with economic activity, as, in the traditional definition, too much money is chasing too few goods.
Actually, if anything, the opposite has been true, which means that for the first time in many years, the worry might be about deflation. Deflation is a trend of falling prices, which might be good for the consumer, but wreaks havoc on corporate balance sheets. That is what has happened in Japan and, as a result, their stock market, as represented by the Nikkei average, has lost more than half its value in the past three decades.
Interesting, isn’t it, that so many highly paid market observers have been more worried about inflation over the years and thus have missed the underlying movement of prices.
The analysts are not alone in having, as The Wall Street Journal points out, egg on their faces. You can count on one hand – well, maybe two – the number of million-dollar stock analysts who predicted deflation a year ago. One of the chief measures of inflation, of course, is the price of gold, which has been falling all year. In addition, as many of you are aware, residential real estate prices seem to have ended their multiple-year climb. For years, as home prices increased, we heard that the price rise was going to be with us for the indefinite future.
What we have learned from the fall in gold, the stagnation of residential property prices and the rise of the stock market is that these markets, and, indeed, the entire economy, can be almost impossible to predict consistently.
As I’ve mentioned from time to time, I can challenge anyone to tell us the name of anyone who was absolutely reliable when it comes to market predictions. That doesn’t mean that there aren’t a lot of economists and market analysts who have a much-greater understanding of the markets than most of us do. But just watch out for those radio and TV commercials that promise silver will double in a year or two.
Stick to something more reliable, like betting on football games. For just $100 a year, I’ll send you a guaranteed list of winners in the NFL. After their games are over, of course.
Bud Stevenson, a retired stockbroker, lives in Fairfield. Reach him at Bsteven254@aol.com.