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Economy , Interest Rates , Stocks

Does the Fed Really Know What It’s Doing?

“The media called its looming decision on whether to tweak its interest rate ’Historic and momentous.’”

by Bob Stokes
Updated: October 14, 2021

In his 2020 edition of Conquer the Crash, Robert Prechter says:

For many people, the single biggest financial shock and surprise over the next decade will be the revelation that the Fed has never really known what on earth it was doing.

This statement is already being confirmed by a surprising source: a staff economist for none other than the Fed itself.

Jeremy B. Rudd, an economist employed by the Fed, just published a paper in which he challenges long-held assumptions about inflation, changes in demand in relation to changes in prices and how the economy works in general.

An October 1 New York Times article delved into the Rudd paper and said:

A staff economist at the world's most powerful central bank went on to say, in effect, that his own employer has been focused on the wrong things for the last few decades.

Yet, many investors around the world cling to every word of a Fed policy statement.

However, the evidence strongly suggests that the Fed is largely irrelevant to the price behavior of the stock market.

Let's review a historic case-in-point from Robert Prechter's landmark book, The Socionomic Theory of Finance. Here's a chart and commentary:


[In December 2015], as the Fed's mid-month meeting approached, the media called its looming decision on whether to tweak its interest rate "Historic and momentous." ... Many reasons were given... A few hours later the Fed--historically and momentously--raised both its discount rate and its federal funds rate, by 1/4 point, for the first time in 9½ years. Yet nothing historic or momentous happened in stocks or any other financial market. At year's end, the major stock averages were quietly trading at the same levels they were the day before the announcement.

The broader point that The Socionomic Theory of Finance makes is that factors external to the market do not govern the market's price trend, whether it's Fed announcements, terrorist attacks, oil "shocks," political news -- even wars.

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The Next Financial Downturn: Why Wait to Prepare?

A "warning" only helps when you receive it beforehand.

Alas, in the financial world, most people wait until the first domino (or two) falls, before they act to protect themselves.

You know how fast dominoes fall.

And as too many investors actually decide what to do, the damage will continue to unfold.

Don't be like most investors.

Enjoy the financial confidence that comes with being prepared before the next inevitable financial downturn.

As Robert Prechter's landmark book, The Socionomic Theory of Finance, says:

How valuable is independence? In late 2008, we received an email from a subscriber saying, "The day the market had its biggest down day in points ever was one of the most serene days of my life." He had gotten out of stocks two years earlier, when signs of enthusiasm and overvaluation were legion; he acted rationally and independently; he did not herd. As a reward, he was financially safe ...

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