Why the Fed will never give a clear answer on rates

by 25 Mar 2015
By Peter Miller of RealtyTrac

If you’re wondering what Federal Reserve Chair Janet Yellen said about interest rates last week, you’re not alone. Is she saying the Fed will move to raise interest rates by June or is she saying the Fed will hold off?

Yellen is simply following in the footsteps of past Fed leaders. As Alan Greenspan once explained, “I guess I should warn you, if I turn out to be particularly clear, you’ve probably misunderstood what I’ve said.”

Yellen has to be vague to the point of incoherence for a very simple reason: If she says something definitive then regardless of what choice the Fed makes huge numbers of people will get hurt. If she makes indefinite and unclear statements and the Fed keeps doing what it’s been doing, then at least we have some sense of stability.

The catch is that stability is not necessarily a good option. For millions of Americans the economy is not “stable,” it’s contracting — between 2000 and 2013 the middle class shrank in every state, according to Pew research. At the same time inflation continues to eat away at buying power. The result is a financial double-whammy which makes talk of “recovery” questionable in many households.

What could go wrong if the Fed tries to force rates higher? RealtyTrac highlights a few issues that will surely arise, including increased government debt, less corporate buybacks, an even slower housing recovery and a loss in Fed holdings.

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