Did Markets Just Have Second Thoughts About Fed Rate Hike?

Monetary Policy: Stocks are selling off again, commodities have been crushed, and even market-based interest rates are headed south. Is this what the Fed had in mind with its quarter-point rate hike on Wednesday?

If so, after the central bank held interest rates at a record-low zero percent for seven years, mission accomplished!

Over and over again, we have noted the historic rut that the economy's been stuck in since the financial crisis. GDP growth putts along at 2%, inflation has stayed below the Fed's target and incomes have shrunk for millions of Americans.

Meanwhile, the much-ballyhooed revival in job growth has turned out to be one of the weakest ever. Only 4.7 million jobs have been created since the recession, 17 million short of what's expected in a typical recovery, the Fed's own data show.

"The economic recovery has clearly come a long way, although it is not yet complete," Fed Chair Janet Yellen said, explaining last week's rate move and promising "gradual" rate adjustments going forward.

But Yellen is mistaken. There is no "recovery." That ended in the second quarter of 2011, when real GDP rose above its previous peak. What we've seen since then is, technically, an expansion. And it's been the worst in modern economic history.

We pretty much know what the Fed's plans are. Its own separately issued forecast calls for a 1.375% fed funds rate by the end of 2016 - meaning we can expect quarter-point hikes each and every quarter next year.

So there you have it: a five-step increase in interest rates. Yes, rates will still be low by historic standards. But then, the economy's performance has been extraordinarily low by historic standards.

Which brings us back to the markets. After the Fed move, markets at first rallied, and many interpreted that as a "vote of confidence" in the tighter policy. It wasn't. Instead, it may have been a sigh of relief that the rate move wasn't bigger, as some rumors suggested.

Going forward, fed funds futures see interest rates rising to a bit over 0.75% by the end of 2016. That leaves a lot of room for future market disruptions.

Not surprisingly, the Fed now also finds itself at odds with the rest of the world, with many nations falling into recession and their central banks cutting rates.

"If (Yellen) fails, the world is in trouble," said Britain's Telegraph. "We have never been in a predicament where a global recession began with rates already near zero." That's right, and maybe it's why former Fed chief Ben Bernanke said last week interest rates might have to go negative in the future.

In Friday trade, market-based interest rates tumbled, the Dow industrial average plunged 2.1%, and commodities continued to crumble - all bad signs. These markets are forward-looking, predicting future economic conditions. Do they know something the Fed doesn't?