Stability

The big news today is the US Federal Reserve’s big FOMC meeting. The expectation is that the Fed will announce a big rate hike, on of the biggest in decades. The previous rate hike amounted to 0.5%, and the expectation for today is 0.75%.

While it’s entertaining watching Jim Cramer and his ilk share their opinions on various matters which–I think–they likely have no clue about, it’s even more interesting learning about how institutions like the Fed really have no clue what they’re doing.

The problem with monetary policy (in the US) as I see it is that the people who set the monetary policy have little incentive to act in the best interests of the ordinary working class like you and I. The Federal Reserve, afterall, is technically an independent non-government entity (i.e., private), although the board of governors is appointed by the head of the government.

The Fed is governed by the Federal Reserve Act, which stipulates that the Fed is required “to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates”.

The interesting bit of language is the “stable prices” part. As some may have noticed, prices haven’t been so stable around the world of late.

I find this interesting in part because it reminds me a lot of the problems in software. Software engineers often talk about “stability” when discussing software, which can take on various definitions depending on the context. The problem with this concept of stability is that the perception of stability varies depending on who you are. With software, stability is often just a matter of how good the person operating the computer is at using computers. I suppose a crude definition for stability is that your program shouldn’t crash or produce incorrect output.

In the case of the Federal Reserve, a lot of people seem to believe the Fed is responsible for making the stock market go up and to the right in a stable and predictable way. Of course the Fed maintains this is not the case, although the Federal Reserve Act doesn’t explicitly state that “stable prices” excludes stock prices as far as I can tell from the words in the bill.

One more thing: the people who make up the Federal Reserve’s board don’t exactly represent your typical end-user (aka the working class). Most of them are privileged folks who made a lot of money in private industry profiting from things that don’t really benefit the working class as far as I can tell. Banking in general is a business of middlemen extracting juice by squeezing those who have the greatest need, whether that’s someone taking out a mortgage for a home so they don’t die of exposure, or the $50 overdraft fee someone might be charged because they tried to spend $5 more than the remaining balance of their chequing account.

One thing that seems to be pretty stable is the upward trend in corporate profits.