The Federal Open Market Committee (FOMC) released its latest statement on monetary policy on January 28, 2015. Since the Fed ended its QE program in October, most of the focus has been on interest rates.
The statement said the following:
"Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. However, if incoming information indicates faster progress toward the Committee’s employment and inflation objectives than the Committee now expects, then increases in the target range for the federal funds rate are likely to occur sooner than currently anticipated. Conversely, if progress proves slower than expected, then increases in the target range are likely to occur later than currently anticipated."
All of this focus is on the federal funds rate (the overnight bank lending rate). But despite these threats of higher rates from the Fed, long-term interest rates are falling. Investors either don't believe what the Fed is saying or they really don't care.
I am expecting and preparing for a recession. I don't know when it will come, but the Austrian Business Cycle Theory tells us that it should come. The Fed has had six years of high monetary inflation and there is little question that this has generated bubbles and misallocated resources. The bigger question is when this will fall apart.
Perhaps an even bigger question is how the Fed will react when the bubbles start to deflate. Will it watch it happen or will it start another round of QE? While we can't be sure, my bet would be on the latter.
Right now, I feel like Janet Yellen is a magician. She is distracting everyone with one hand. That is interest rates. But nobody is paying attention to the other hand. That hand is about to pull a rabbit out of the hat in the form of new money.
Again, the timing of this is impossible to predict, but we shouldn't be surprised when it happens.