Straight Talk: The Monthly Prime Rate Ritual

By Al Jacobs

During an appearance before the House Financial Services Committee on Nov. 4, Federal Reserve Chairwoman Janet Yellen commented as follows on the possibility of an interest rate hike:

“What the committee has been expecting is that the economy will continue to grow at a pace that is sufficient to generate further improvements in the labor market and to return inflation to our 2 percent target over the medium term. If the incoming information supports that expectation, then our statement indicates that December would be a live possibility.”

If, in fact, an increase is in the offing, in which a key rate will be raised from its record low of near zero, it will be the Fed’s first rate hike in nearly a decade.

Despite Ms. Yellen’s assurances, our economy is not vibrant, nor is the nation experiencing “improvements in the labor market.” Jobs are disappearing, with an actual unemployment rate now exceeding 20 percent. Traditional sources of income for many Americans no longer exist. Interest on savings is gone; stock dividends are meager; pensions are becoming a thing of the past. Many citizens are struggling to exist.

As for the federal funds rate, it’s the U.S. national debt, now approaching $18 trillion, which is the elephant in the room. If that rate is significantly increased, Uncle Sam finds himself awash in payments which he cannot service without incurring further debt. This potential vicious cycle explains why the rate has remained where it is.

At some point political considerations become the dominate factor. If the administration must validate the economy’s health, expect a token increase of perhaps a quarter of a percent, followed by media ballyhoo as though a cataclysm shook the earth to its core. For a brief interval market indices will vibrate violently, amidst irrational prognostications from countless authorities and experts. Thereafter we’ll return to business as usual.

This is the sort of nonsense in which both the government and the investment world are based. It’s summarized in Shakespeare’s Macbeth: “… a tale, told by an idiot, full of sound and fury, signifying nothing.”

Al Jacobs (Dana Point), a professional investor for nearly a half-century, issues a monthly newsletter in which he shares his financial knowledge and experience. You may view it at www.onthemoneytrail.net.