Why the Fed Extension of ZIRP is Bad News for Investors

January 27th, 2012
in contributors

by William Kurtz, CandleWave LLC

crashThe stock Indexes zoomed upward following the Fed Open Market Committee's announcement that "it will not raise interest rates until at least late 2014, even later than investors expected, in an effort to support a sluggish economic recovery."  Inflation is expected to remain stable.  One Member, an "inflation hawk," dissented from the majority's opinion.  The Dow Industrials rose to 12738, which is higher than Tuesday's High but lower than Monday's High, which is the one we're watching.  The other Indexes have moved in rough synchrony with the Dow.   As of 2 PM, the Dow has turned Down slightly, and now stands at 12724.

Obviously, investors took this news as bullish for the stock market. I have a very different take on it.

Follow up:

I think this tells us that the majority of the Open Market Committee is scared stiff of the prospect of Deflation. The Committee intends to keep core interest rates at essentially zero for at least three years, in an effort to stave it off. It has taken this group of brilliant economists a very long time to come to the realization that it is Deflation, not Inflation, that is the present and growing danger; but obviously the light has now gone on in their heads, and they're terrified. That they've told us that they intend to freeze core interest rates at essentially zero for at least three years (!) reveals the great depth of their concern. It's been a long time coming.

This might be characterized as "soft quantitative easing" - a stimulus effort without printing money.

If we will just open our eyes and look, we can see signs of Deflation all around us - contracting credit, declining producer prices, declining house prices, and destruction of debt via "restructuring" of debt as well as outright bankruptcy.

In the long run, I think the Fed will prove to be impotent to stave off Deflation.

Also in the long run, I think this is very bad news for the stock market. It confirms what we've been saying for years.

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1 comment

  1. Clare Cavalcante says :

    Excellent analysis, as always!

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