The Federal Reserve's surprisingly "hawkish" statement rocked the stock market for a brief moment but equities quickly recovered. Still, I find myself scratching my head at the distinct change in tone and language that the Fed used today to describe future policy.
The Fed left the door wide open to a December rate hike, showing less concern about global market and economic weakness than it did only six weeks ago.
It is true that financial markets have rallied strongly from their most recent lows — from China's financial capital to our own. It is also true that, from Beijing to Brussels, economic policy is getting more aggressive to ward off the risk of recessions in China, Europe and Japan.
However, neither the overseas numbers, nor domestic data, have improved much since the Fed's last meeting. Indeed, we have seen slower payroll growth in the U.S., weakening manufacturing, slumping home sales and a continued crunch in commodity prices, all signifying renewed sluggishness in the world economy, not an accelerating rate of growth.
In China, steel prices are falling faster than producer can cut prices, leaving a glut of the heavy metal hanging around the necks of steel company CEOs. There is an overabundance of oil, natural gas, copper and other raw materials, which, one could argue, is both a cause and effect of continued deterioration in global growth.
Inflation remains nowhere near the Fed's 2-percent target, while six million people in the U.S., alone, remain underemployed.
There is an additional irony in the Fed's hawkish tone, in so far as the Richmond Federal Reserve released a study just a few days earlier, showing how policy errors in both the early and late 1930s exacerbated the effects and duration of the Great Depression.
"The Federal Reserve could have prevented deflation by preventing the collapse of the banking system or by counteracting the collapse with an expansion of the monetary base, but it failed to do so for several reasons. The economic collapse was unforeseen and unprecedented. Decision makers lacked effective mechanisms for determining what went wrong and lacked the authority to take actions sufficient to cure the economy. Some decision makers misinterpreted signals about the state of the economy, such as the nominal interest rate, because of their adherence to the real bills philosophy. Others deemed defending the gold standard by raising interests and reducing the supply of money and credit to be better for the economy than aiding ailing banks with the opposite actions," Fed historian Gary Richardson wrote.
A rate hike by the Fed in December — with deflation remaining the world's primary economic threat; with interest rates at zero in much of the world; with at least eight countries sporting negative rates — could be the type of misstep the Fed made in 1932 and 1937. In both instances, premature normalization led to a worse outcome than if the Fed had left policy unchanged.
Interest rates go to zero, or negative, for a reason. A rate hike in the U.S. would force the dollar higher, exacerbate strains in world currency markets and, while I haven't discussed this before, negatively impact credit spreads, which are widening to a worrying degree.
The Fed may be misinterpreting market signals and, instead, choosing a path toward higher rates simply to clear up its communications process.
That is not what should drive policy. Policy should change as the data change, something the Fed has communicated over and over again. The data don't support a hike. If the Fed does, indeed, raise rates in December, I would expect the New Year would bring back the old policy, as the markets would ultimately demand a U-turn.
Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. Follow him on Twitter @rinsana.