December has proven to be an eventful month. The volatility in the markets has been remarkable, with the DOW experiencing a staggering drop of 890 points before climbing back 710 points. Oil prices have plummeted by 26 percent, now sitting at just $55 per barrel, and gold prices have taken a hit as well.
But this situation could grow even more unpredictable. Just look at the challenges faced by Russian President Vladimir Putin. The Russian ruble has sunk by 50 percent against the dollar this year, compelling the central bank to raise its key interest rate from 10.5 percent to a staggering 17 percent just this week.
Imagine if the federal funds rate reached 17 percent. It would likely cause every asset bubble to burst almost instantly, leading to widespread financial panic and a severe economic downturn.
While the United States has more resilient economic prospects than Russia, we are not entirely immune to the fallout of mismanaging our currency. A reckoning for fiscal irresponsibility is inevitable, and we believe that one day the repercussions of our own prolificacy will become apparent.
The Inevitable Rise of Poverty
Currently, the spotlight is on Russia, where citizens are facing grim economic realities. As reported by The Washington Post, top economic officials have stated that Russians must adapt to declining living standards. Deputy Prime Minister Olga Golodets indicated that poverty will ‘inevitably rise’ due to inflation. Meanwhile, Elvira Nabiullina, the central bank president, emphasized the need for a shift in consumer behavior, advocating for the replacement of expensive imported goods with more affordable domestic products.
The government expects inflation to exceed 10 percent, pushing the economy into recession. If trends continue, store shelves could soon become barren, reminiscent of the chaos during Russia’s 1998 default when consumers rushed to exchange their currency for items of real value.
Putin’s predicament stems largely from falling oil prices. Like many U.S. oil fracking operations, the Russian economy has relied on the assumption of continuously high energy prices. With that assumption now proven false, significant adjustments are required.
Unviable ventures need to be curtailed, bad debts must be dealt with, and inefficient operations should be put on hold until market conditions allow for higher valuations.
Exactly When the Fed Will Raise Rates
This week, global attention has shifted as market reactions to Federal Reserve announcements have been remarkable. After Janet Yellen made some comments on Wednesday, the DOW surged by 288 points, followed by another increase of 421 points on Thursday. Quite a spectacle!
“Janet L. Yellen, the Federal Reserve chairwoman, indicated that the Fed still plans to start raising interest rates next year but will do so only when the timing is right, likely not before late April,” according to the New York Times.
“Ms. Yellen’s comments, along with the Fed’s policy-setting committee’s statement, highlighted the central bank’s reluctance to act hastily in response to positive economic indicators, including stronger job growth and falling oil prices. The Fed removed phrasing suggesting it would wait a ‘considerable time’ before initiating rate hikes, typically interpreted to mean at least six months. Nonetheless, they maintained that there was no intention to signal a shift in policy.”
At Economic Prism, we maintain a skeptical view on whether the Fed will ever increase the federal funds rate, unless compelled as the Russian central bank has been. If the Fed does eventually raise rates, we predict it will be a short-lived measure. After all, the United States cannot afford genuine prosperity.
While stocks may have responded positively to Yellen’s statements, such enthusiasm is likely to be fleeting. Eventually, the market will turn against her remarks—and even her hairstyle. If that happens, what will she do? Will she really implement sustained rate increases?
We find that hard to believe.
Sincerely,
MN Gordon
for Economic Prism
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