As the Federal Reserve Bank meets this week to decide the fate of interest rates, you can’t help but wonder why they bother meeting at all.

Maybe the catering team make really good sandwiches.

Perhaps we’re being a little arrogant, but really, what are the chances the Fed are going to surprise the markets and increase rates?

I’d say slim to none.

In fact, I have an Oz lotto ticket for tonight’s draw, and I reckon there’s a higher chance of me winning a slice of the $40 million at stake than there is the Fed increasing rates even one tiny basis point.

You see, every time the Fed has got together recently monetary policy hasn’t changed.
And there hasn’t even been an indication for investors when things may change because the Fed keeps using the term ‘extended period’.

So much so, that when the minutes are released, some people spend hours going over them, looking for any hint of a future direction the Fed might take.

But the problem is, there’s no real direction for the US economy in the minutes. The Fed is desperately trying to steer the economy towards a recovery but it’s not working.

All of the widely used tools for determining if a rate rise is required are pretty ordinary. Unemployment in the US is hovering around 10%, even after the so called job creation package. Consumers are so selective about what they spend their money on now that they can’t be relied on to “save” the economy. And supposedly, even with all of this loose money floating around, inflation is low and not a threat.

As I mentioned last Friday, it’s widely accepted that the cash rate will remain near zero until at least next year.

However with interest rates near zero for an ‘extended period’ what can the Fed actually do to boost the recovery?

And it’s starting to become pretty clear, that no matter how much the central bankers fiddle around with the economy, they just can’t fix it.

Even all of that money printing hasn’t fixed the economy.

So what can they do now? Well at the moment they’re not doing a great deal.

Look, it’s no secret that the current policies coming out of the Fed are being criticised.

In fact all of the things they’ve done to fix the economy are more likely to cause long term damage.

Initially this policy implemented by the Fed was an attempt to keep the markets going rather than giving into panic. And the next part of the plan was to get the economy going again.

While that might have seemed like a great idea at time – to some, over the past two years the economy has revealed it doesn’t want to get going again.

As a regular reader, you’ll be well aware that we’ve argued at length that there’s no place for central bankers in a true free market.

And because in the last few months very little has been done by Dr Bernanke to ‘direct’ the market, you could have almost thought the Fed is scared of upsetting the economy by moving rates.

But here’s the thing. It may be scared of upsetting the economy, but it’s still got a plan to interfere with things should the dreaded ‘double dip’ recession come around.

The poor performance in May clearly showed that the recovery is far from ideal. David Wyss, a chief economist at Standard & Poor’s recently pointed out that it’s ‘… a fragile recovery. There is still a lot of stuff that could go wrong.’

Now, the fact the US is in a delicate state isn’t new information to anyone. But this is where the Fed has ‘plans’.

A former member of the Fed, Vincent Reinhart has suggested in that in the event of double dip recession occurring, the Fed would need to show a firm commitment to keeping rates near zero. For longer.

Reinhart said that that the next move could be for the Fed to reopen its purchases of housing related securities. However he actually doesn’t think this move would help.

But after that, there aren’t a lot of idea’s floating around.

Clearly, the lack of idea’s in how to kick start the economy at the Fed is demonstrating that there isn’t anything they can do. No amount of tweaking, buying, swapping, lowering or printing will get the US data moving in the direction that Bernanke and his crew want.

However, Reinhart has pointed that it’s not the financial markets that are broken and need repairing. The problem is no one wants to spend any money.

The average person in the US has decided when times are tough, like now, it’s not a good idea to spend money and they’re saving some cash. When all the Fed wants them to do is step and spend some newly printed greenbacks.

You know, the funny thing is, the American consumer has got it right, whereas the Fed and the mainstream economists have got it wrong.

So it’s a little surprising that the Fed decide to lock themselves in a room for two days to discuss rates and the general state of the economy. Let’s be honest, with things unlikely to change, it could be done over email without them bothering to get out of bed.

Regards.
Shae