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The Fed needs to stop being delusional

A trader works on the floor of the New York Stock Exchange while Federal Reserve Chairwoman Janet Yellen explains why the Federal Reserve chose not raise interest rates on September 17, 2015 in New York.
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A trader works on the floor of the New York Stock Exchange while Federal Reserve Chairwoman Janet Yellen explains why the Federal Reserve chose not raise interest rates on September 17, 2015 in New York.

What exactly is the Federal Reserve trying to do? Fed members talk of transparency but then it seems we get anything but that. Transparent means clear and unambiguous. Is that what we have?

Last month, both Fed Chair Janet Yellen and Vice Chair Stanley Fischer spoke about the need for normalization and that all data points, with the exception of inflation, are at or near the targets set out years ago.


But then the world got hit with the China syndrome, U.S. economic data began to weaken, earnings estimates for third-quarter earnings season got slashed, pre-announcements were all negative, global markets began to come unglued and concerns began to build that the time was not right for the Federal Reserve to begin to normalize rates.

In September, the Fed again resisted moving on rates because they did not want to disrupt or create additional turmoil for global markets.That should have been OK but, in fact, the lack of movement by the Fed actually caused distress for the markets as investors began to realize that not only did they miss the opportunity to normalize rates back in the spring/early summer, but now the door appears to have been slammed shut and so what does that really say about the economy?

Now, since they made that decision, investors and the markets have been bombarded with conflicting messages from different members of the Fed. On Monday, Daniel Tarullo, a member of the Board of Governors, came out and spoke in his "dovish voice," saying that "Given where I think the economy would go, I wouldn't expect it would be appropriate to raise rates."

Next up was Lael Brainard, also a member of the Board of Governors, who chimed in and said that "The risks to the U.S. economy are now to the downside and that it is important to nurture the recovery … These risks argue against prematurely taking away the support that has been so critical to the U.S. economy's success." Comments like this seemed to settle the anxiety — the markets now appeared to take in stride that a rate decision seems to have been pushed off until the first quarter of 2016.

Well, not so fast. Both Chair Yellen and Vice Chair Fischer keep telling the world that they support raising rates this year — causing more confusion and frustration. Then we get earnings kickoff, and the results are mixed at best. Even the beats are getting punished as investors grow more concerned about what the future looks like. Then on Wednesday, we got hit with more weak U.S. macro data: Retail sales, a direct read on the consumer, came in weaker than expected; PPI, the index that details final demand, declined by 0.5 percent; and prices for final demand goods fell by 1.2 percent. None of these data paints a bullish picture at all.

Here's the bottom line: The Fed needs to get its act together. They need to stop being delusional about the state of the U.S. economy and the global economy. They need to be clear. Now, that does not mean that the different members can't have their own opinions. What it means is that Chair Yellen needs to take control. She should make clear to global markets that any talk of raising rates is now a 2016 conversation. Period. The end.

It is not happening in October and it surely should not happen in December, when the country will be facing another leadership crisis and debt ceiling crisis and government shutdown. Effective Nov. 5, the country will run out of money, but Congress has conveniently voted on a stop-gap spending bill that will take us to Dec. 11. The next Fed meeting is Dec. 15-16. Think about it: If the Fed did not move on rates when they clearly should have in April, May, June or even July, when there was relative calm in global markets, does it really make sense to do it in December, when Washington will be on the edge, global markets are in turmoil and the data do NOT support it?

That's going to be a tough sell when they're justifying it to the country – and the rest of the world.

Commentary by Kenny Polcari, director of NYSE floor operations at O'Neil Securities. He is also a CNBC contributor, often appearing on "Power Lunch." Follow Kenny on Twitter @kennypolcari and visit him at kennypolcari.com.