Overall, the reaction to the decision points to the underlying fragility of financial markets, which have become a house of cards as a result of the massive inflows of money from the Fed and other central banks, and are now extremely susceptible to even a small tightening in financial conditions.
Sharp fall on Wall Street in response to Fed interest rate decision
In one of the most closely watched decisions for years, the US Federal Reserve Board lifted its base interest rate by 0.25 percentage points yesterday and indicated that it expects the number of rate rises next year to be reduced from three to two.
The decision, the fourth rise this year, puts the Fed’s target rate at between 2.25 and 2.50 percent. In a clear indication that it is easing rate rises, the Fed reduced what it considers to be the neutral rate—one that neither stimulates nor dampens the economy—from 3 percent to 2.8 percent.
However, these moves, described as a “dovish” rate hike, were not welcomed by Wall Street. Addicted to the provision of ultra-cheap money in the ten years since the global financial crisis, it fell sharply.
After rising by around 300 points at the start of the day, the Dow fell on the announcement of the rate increase and then dropped even further as Fed chairman Jerome Powell addressed a news conference. It fell by as much as 500 points at one stage, with traders reportedly yelling “Stop this guy talking.”
All indexes were down for the day. The Dow fell by 350 points, a drop of 1.5 percent, the S&P 500 index was off by 1.5 percent and the NASDAQ index was down by 2 percent. Following earlier sharp falls, the S&P 500 index has lost 9 percent so far this month. Both the Dow and the S&P have reached their lowest points for the year.
The decision to lift rates was generally expected with many market analysts observing that had the Fed not proceeded this would have sent a downbeat signal on the state of the economy and could have increased, not lessened, market turbulence.
It was preceded by a campaign to bring about a significant shift in the Fed’s policy. US president Donald Trump has regularly tweeted that he regards Fed tightening as “crazy” and “loco” and that Fed rate rises were jeopardising US economic growth.
He has now been joined by others. This week the Wall Street Journalpublished a major article by former hedge fund investor Stanley Druckenmiller and a former member of the Fed’s governing council, Kevin Warsh, calling for a halt to rate rises.
Their focus was not so much on the US but the state of global financial markets. They pointed to a reversal by global central banks of their 10-year policy of easing liquidity, starting at the beginning of October, noting that stock prices had commenced their fall at that time and “this is no coincidence.”
The world’s central banks, as part of their quantitative easing (QE) program, had amassed $11 trillion on their balance sheets. Two months ago this gave way to global tightening (QT) as central banks started to run down their balance sheets. While the Fed started this process 15 months ago, it had been offset until now by the asset purchases of other central banks. That situation had now ended.
The article warned that economic growth outside the US had decelerated over the past three months, global trade had slowed markedly, running at one-third lower than a year ago, and growth in important economies, like China, was significantly weaker. “No ocean is large enough to insulate the US economy from slowdowns abroad” and no forecasting model “adequately captures the spillovers and spillbacks from the US economy and the rest of the world.”
The two authors directed their principal focus not to the Fed’s base interest rate as such, but on the impact of the winding back of the Fed’s asset holdings, which stood at more than $4 trillion at their height. They said the Fed’s silence on this issue was “contributing to the tumult.”
“We were assured by policy makers that QE provided large benefits to the real economy. If so, won’t its reversal come with a cost? It can’t be all rainbows and unicorns.”
They concluded that the Fed could ill afford a major policy error and that it should cease, at least for now, “it’s double-barrelled blitz of higher interest rates and tighter liquidity.”
After publishing the article, the Wall Street Journal weighed in with an editorial emphasising its main points, in particular that the “larger argument for a pause is that the Fed is unwinding the largest experiment in modern history.”
“Central banks around the world are moving away from multi-trillion-dollar bond purchases and zero-interest rates, and they’re doing it without a road map. What is the ‘normal’ interest rate in this post-crisis world? We don’t know, and we doubt the Fed does either.”
Critics of the Fed decision directed attention to Powell’s remarks at his press conference that the Fed’s reduction of its balance sheet would take place at the rate of $50 billion per month. He indicated this was a pre-set agenda and the focus of the Fed’s monetary policy would be on setting the interest rate.
Responding to questions on Trump’s interventions, he said the Fed would not be deterred from carrying out its mandate. Insofar as market volatility was concerned, the Fed took this into account through its impact on the tightening of credit conditions which had been in evidence.
Powell said that global growth conditions were not what they were in 2017 when there was “synchronised” global growth and this had been replaced by “modest retracing.”
Significantly, the Fed expects growth in the US slow. Growth is predicted to be 3 percent in 2018 followed by a fall to 2.3 percent in 2019. Powell said there was an “angst about growth going forward.”
On the question of wages, which are always a crucial factor in Fed decisions, Powell said wage rises of around 3 percent were “welcome” and they had not given rise to increased inflation. Wage increases at present were now equivalent to the inflation rate of around 2 percent plus productivity growth of 1 percent. If that situation changes, however, then the Fed can be expected to take a more hawkish approach on rate rises.
Overall, the reaction to the decision points to the underlying fragility of financial markets, which have become a house of cards as a result of the massive inflows of money from the Fed and other central banks, and are now extremely susceptible to even a small tightening in financial conditions.
A closer look at American “democracy”
20 December 2018
A central theme of the hysteria over alleged “Russian meddling” in US politics is the sinister effort supposedly being mounted by Vladimir Putin “to undermine and manipulate our democracy” (in the words of Democratic Senator Mark Warner).
According to the narrative fabricated by the intelligence agencies and promoted by the Democratic Party and the corporate media over the past year and a half, Putin and his minions hacked the Democrats and stirred up social divisions and popular grievances to secure the election for Donald Trump, and they have been working ever since to destroy “our institutions.”
Their chosen field of battle is the internet, with Russian trolls and bots infecting the body politic by taking advantage of lax policing of social media by the giant tech companies such as Google, Facebook and Twitter.
To defend democracy, the argument goes, these companies, working with the state, must silence oppositional viewpoints—above all left-wing, anti-war and socialist viewpoints—which are labeled “fake news,” and banish them from the internet. Nothing is said of the fact that this supposed defense of democracy is a violation of the basic canons of genuine democracy, guaranteed in the First Amendment to the US Constitution: freedom of speech and freedom of the press.
But what is this much vaunted “American democracy?” Let's take a closer look.
The two-party monopoly
In a vast and complex country with a population of 328 million people, consisting of many different nationalities, native tongues, religions and other demographics, spanning six time zones and thousands of miles, two political parties totally dominate the political system.
The ruling corporate-financial oligarchy controls
both parties and maintains its rule by alternating
control of the political institutions—the White
House, Congress, state houses, etc.—between
them. The general population, consisting
overwhelmingly of working people, is given the
opportunity every two or four years to go to the
polls and vote for one or the other of these
capitalist parties. This is what is called
“democracy.”
The monopoly of the two big business parties is further entrenched by the absence of proportional representation, which it makes it impossible for third parties or independent candidates to obtain significant representation in Congress.
The role of corporate money
The entire political process—the selection of candidates, elections, the formulation of domestic and foreign policies—is dominated by corporate money. No one can seriously bid for high office unless he or she has the backing of sponsors from the ranks of the richest 1 percent—or 0.01 percent—of the population. The buying of elections and politicians is brazen and shameless.
Last month's midterm elections set a record for campaign spending in a non-presidential year—$5.2 billion—a 35 percent increase over 2014 and triple the amount spent 20 years ago, in 1998. The bulk of this flood of cash came from corporations and multi-millionaire donors.
In the vast majority of contests, the winner was determined by the size of his or her campaign war chest. Eighty-nine percent of House races and 84 percent of Senate races were won by the biggest spender.
Democratic candidates had a huge spending advantage over their Republican opponents, exposing the fraud of their attempt to posture as a party of the people. The securities and investment industry—Wall Street—favored Democrats over Republicans by a margin of 52 percent to 46 percent.
Elections are anything but a forum to openly and honestly discuss and debate the great issues facing the voters. The real issues—the preparation for new wars, deeper austerity and further attacks on democratic rights—are concealed behind a miasma of attack ads and mudslinging. The research firm PQ Media estimates that total political ad spending will reach $6.75 billion this year. In last month's elections, the number of congressional and gubernatorial ads rose 59 percent over the previous, 2014, midterm.
The setting of policy and passage of legislation is helped along by corporate bribes, euphemistically termed lobbying. In 2017 alone, corporations spent $3 billion to lobby the government.
Ballot access restrictions
A welter of arcane, arbitrary and anti-democratic requirements for gaining ballot status, which vary from state to state, block third parties from challenging the domination of the Democrats and Republicans. These include filing fees and nominating petition signature requirements in the tens of thousands in many states. Democratic officials routinely challenge the petitions of socialist and left-wing candidates who are likely to find support among young people and workers.
Media blackout of third party candidates
The corporate media systematically blacks out the campaigns of third party and independent candidates, especially left-wing and socialist candidates. The exception is candidates who are either themselves rich or who have the backing of wealthy patrons.
Third party candidates are generally excluded from nationally televised candidates’ debates.
In last month’s election, the Socialist Equality Party candidate for Congress in Michigan’s 12th Congressional District, Niles Niemuth, won broad support among workers, young people and students for his socialist program, but received virtually no press coverage.
Voting restrictions
Since the stolen election of 2000, when the Supreme Court shut down the counting of votes in Florida in order to hand the White House to the loser of the popular vote, George W. Bush, with virtually no opposition from the Democrats or the media, attacks on the right of workers and poor people to vote have mounted.
Thirty-three states have implemented voter identification laws, which, studies show, bar up to 6 percent of the population from voting. States have cut back early voting and absentee voting and shut down voting precincts in working class neighborhoods. A number of states impose a lifetime ban on voting by felons, even after they have done their time. In 2013, the Supreme Court gutted the enforcement mechanism of the 1965 Voting Rights Act, with no real opposition from the Democrats. The United States is one of the few countries that hold elections on a work day, making it more difficult for workers to cast a ballot.
Government of, by and for the rich
The two corporate parties have overseen a social counterrevolution, resulting in a staggering growth of social inequality. In tandem with this process, the oligarchic structure of society has increasingly found open expression in the political forms of rule. Alongside the erection of the infrastructure of a police state—mass surveillance, indefinite detention, the militarization of the police, Gestapo raids on workplaces and attacks on immigrants, the ascendancy of the military in political affairs, internet censorship—the personnel of government have increasingly been recruited from the rich and the super-rich.
More than half of the members of Congress are millionaires, as compared to just 1 percent of the American population. All the presidents for the past three decades—George H. W, Bush, Bill Clinton, George W. Bush, Barack Obama—have either been multi-millionaires going in or have cashed in on their presidencies to become multi-millionaires afterward. In the person of the multi-billionaire real estate speculator and con man Donald Trump, the financial oligarchy has directly taken occupancy of the White House.
In The State and Revolution, Vladimir Lenin wrote: “Bourgeois democracy, although a great historical advance in comparison with medievalism, always remains, and under capitalism is bound to remain, restricted, truncated, false and hypocritical, a paradise for the rich and a snare and deception for the exploited, for the poor.”
The working class will never achieve genuine democracy, nor succeed in defending the democratic gains it extracted in the course of more than a century of struggle against the capitalist class, so long as it remains an oppressed class, exploited by the corporate owners and their state apparatus. Democracy for the workers and oppressed, as opposed to the phony democracy of the rich, can be achieved only through the creation of organs of workers’ struggle and control and the building of a revolutionary leadership to overthrow the existing state, place power in the hands of the working class, expropriate the capitalists and establish a socialist economy based on social equality.
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