The Fed's 3 Choices, and Why They All Stink

As if the focus has not already been enough on our Federal Reserve, the only thing any one involved with global financial markets is thinking about right now is the Fed decision on September 17. 

From where I sit, the Fed has three choices:

    1.  Sit pat and do nothing.
    2.  One and done.
    3.  Raise and sit tight.

    I think the Fed members have backed themselves into a corner, and none of the above three has any appeal to me, any more, given current global circumstances. If I was a Fed member, I would be sitting in Washington wondering how we got ourselves so badly trapped when the smaller central banks of the world (all central banks around the world are smaller compared to the Federal Reserve) have maneuvered through the global crisis far better than our central bank has.

    The first choice is not appealing, because after threatening to raise rates for so long -- and ignoring the pleas of the IMF, the World Bank, the ECB and the Chinese central bank authorities -- doing nothing now will seem like caving in. Plus it will give investors worldwide a reason to think that the economic picture is not as rosy as the Fed talking heads have been publicly saying they were. In addition, it would also be a tacit nod to the fact that the U.S. is not an island unto itself, something our Federal Reserve has always refused to acknowledge.

    The second choice is to raise rates and then say, "we are done for X amount of time." This choice is also not appealing, as it would set a finite time frame for the next raise -- and lead to a similar situation when the time comes for the next raise, regardless of economic conditions at home -- and around the world.

    The final choice is to raise and say nothing definitive except for the usual song and dance of data dependency. This would be the best choice, if the situation globally were not as tenuous as it is, at the moment. You have the EU still on the edge of a recession (a good many member countries are, at least) and a push could send it over the edge. You have China that is definitely seeing a slowdown, however much the authorities there deny it. You have other major up and coming economic powerhouses, like India, lowering rates. Then you have countries like Russia and Brazil that already are in recession. Raising rates ?and consequently pushing the greenback higher -- will only drive these countries deeper into the abyss. More importantly, a strengthening U.S. dollar almost certainly raises the chances of a global currency crisis going forward, especially in emerging economies.

    If I were an FOMC member, I would be spending this weekend pulling my hair out wondering how we painted ourselves into such a tiny corner. 

    If pushed, my choice would have to be option 2 -- although none of the 3 are appealing, as I said.

    On a personal note, today -- Sept. 11 -- will always be a day of diametrically opposing emotions for me: deep sadness and sorrow for the absolutely unbelievable way our lives were changed 14 years ago, and also joy and happiness, as it is also my kid brother's birthday, today, although he has been around a "few" years more.

    Have a safe and fun-filled weekend, packed with NFL games. This is likely the year that my Cowboys are finally back in the Super Bowl -- where they belong.

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