The question of whether markets are headed down because the Fed did not raise the FF rate at this month’s FOMC meeting is floating around the media today (one example is linked). It’s an interesting proposition, but I think I’d be a bit more cautious than to splash what hasn’t been determined in a definitive way across the financial headlines because it could ultimately be misleading.

I don’t pretend to have all the answers or even any answer, really. But there is always the possibility that had the FOMC decided to hike the FF rate, instead of one or two percent off the DOW today, the reaction could have been more pronounced, like 5% or more. When market conditions result in a natural tightening, coinciding with a reduction in inflation and NGDP expectations and the Wickselian equilibrium rate, doing nothing still results in tighter policy. It is simply less tight than would have occurred had the FF rate been hiked.

I could be completely wrong, of course, and the downward trend in markets today reflects collective psychological problems. But I am not entirely sure how one would go about proving that. I suppose that it is possible that it might have something to do with the revelation that the inflation target won’t be hit until 2018, but markets were already reflecting some time farther off in the future, which is only a confirmation by the FOMC of monetary conditions that already existed in a more persistent nature.

Speaking of proving things, I still see no proof that tighter policy, either the active or passive variety, rather than easier is in order. If one is of the opinion that we can’t miss what we’ll never have, and the absence of it is for some greater good, I would want to know what that greater good is before making a choice to accept this kind of monetary policy management. As it stands, however, the case that has been made thus far simply has not been convincing except to the point that more than a few FOMC members might be a few sandwiches short of a picnic.

The choice made yesterday was a mistake. And because I don’t see any sign of more QE on the horizon, I’d suggest that we all buckle up because we’re in for a wild ride.

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