One must crawl in mind of the central bank and think like they do. You see, it's like parenting kids. You know what you need to accomplish with them. But you can't tell them everything you're trying to do.
In the same way, the Federal Reserve tries to "parent" the economy and markets. They "supposedly" want to keep unemployment low and inflation in check. That's a part of their official mandate.
However, I believe they have a public goal and then a private goal. Their public goal is stated above. Their private goal, in my opinion, is to erode away your wealth which keeps you enslaved to the government and employers (those within power).
You see, they have a 2% inflation target. That means they want inflation to rise about 2% annually. Another way it could be said, but they'll never say it this way is: We want the American public's purchasing power to erode slowly over time to where they really can't put a finger on it. So our goal is to erode their purchasing power by about 2% per year.
You see, the less wealth and purchasing power that you have, the less "say" you have in your life. Wealth empowers. It gives you choices. One of the biggest evils of poverty is that it takes away your choices.
Governments love control and they control you best by having an impoverished people (struggling middle class and poor). Corporations need you to be "paycheck to paycheck" too because you'll be forced into staying at jobs you don't like and it forces you to "need" them.
It's why there's a bias in our society towards spending, debt, etc. and very little encouragement to save. And if there's very little saving, they don't even have to worry about you investing.
Yet it's those that save and invest that have the wealth. The good news? Most anyone could have wealth over time if they wanted it. You simply choose to set your lifestyle (cost of living) WELL UNDER what you make and out of the margin you've got leftover, you save (which empowers you and you pay down debt, which frees you from the clutches of economic slavery).
But back to why you have to "read between the lines" of what the Federal Reserve says when they have their televised meetings with the press.
Why The Federal Reserve Can't (Or Won't) Speak Freely
Can you imagine the Federal Reserve chairman coming out and saying, "The economy is bad. Things are horrible. Yes, the market is overvalued?"
That, in and of itself would cause a stock market crash. So they can't just come right out and say things are bad...even if they know they are. Just like you can't tell your kids everything that rolls around in your head, they can't speak openly about everything they think as they try to "parent" the economy. If they said everything they knew, it would turn investor sentiment so negative, so quickly, that it would crash the stock market and economy in-and-of-itself. So they can't do that. That's why one must read between the lines.
Additionally, there's a thought that "the Fed knows it all". The Fed isn't God. They're not all-knowing and they don't know the future. They do know a lot and they have access to a lot of real-time economic data. However, many in the Fed are economists by trade and economists tend to be horrible at forecasting the stock market. And even they can get sucked into the thought of "things have been good so they'll likely continue to be good".
Right now, they're saying that. Paraphrased: Hey, the economy is good. Unemployment is low. Wages are rising (ever so slightly). Inflation is rising a bit now but we don't expect it to get out of hand, etc.
Yet, they know that the stock market is at an elevated level. And they know they have to bring that down or else it will cause even more havoc if they just turned a blind eye to it. So the Fed-induced bubble that they inadvertently helped to create now has to be corrected with interest rate hikes.
But here's what they're not going to tell you...maybe its because they don't know it or maybe its because they know it but don't want to spook you (and it's probably the latter): Rising interest rates alone eventually stall out the economy. But right now, we've got rising rates and rising oil prices.
Both of those soak up any extra money that the average consumer has to spend, eventually. As gas prices go up, it costs you more to fill up your tank to go to work, church, the grocery store, etc. That's less money that you can spend on retail items (clothing, out-to-eat food places, etc.).
Consumer spending acts fuel to the economy. Cut off the fuel and you stall out the economy.
It's the same thing for interest rates. As servicing debt gets more costly in mortgages, auto loans, credit cards, home equity loans, etc. the more of your money that gets sucked up in just the interest on those debt payments alone. The more of your money that gets sucked up in rate hikes and higher gas prices essentially acts like an added tax to your life that you didn't get to vote on.
The Economic Death Spiral
It cuts off consumer spending which means less is bought from corporations. They end up with lower earnings and that justifies lower stock prices. As this all unfolds, they have to cut costs. The biggest expense that they can control is...you guessed it!...payrolls!
So they start to layoff people, which causes consumer spending to curtail even more either because you lost your job OR because you know several around you that lost theirs, and either way, you curtail your discretionary spending as a result. This continues the downward spiral in the economy and stock market until price-to-earnings ratios get dirt cheap and usually until the Federal Reserve steps in to help turn things around.
By the way, you'll notice, the economy doesn't just seem to turn itself around anymore without the Federal Reserve helping it out. It shows how truly weak and fragile our debt-laden economy really has become over the last couple of decades or so.
How You Can Maneuver Through The Upcoming Economic/Stock Market Storm:
It's my job to constantly assess the stock market, economy, etc. and to make stock market recommendations based off of all the data that I constantly collect. (It's truly investing, not trading).
So if you feel like all of this is over your head OR that you think you know some but would like someone looking over your shoulder and helping you out, the the Logical Investor is for you. It's a great place to learn. It comes with monthly newsletters, weekly videos and an interactive investor community, where you can get your investing questions answered.
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