Market observers continue to give short shrift to the fact that the Federal Reserve is the perpetrator of the “Red Wedding” in the markets. The Federal Reserve doesn’t trust the markets. It thinks it knows better than the markets how to set the price of capital and create the conditions for economic growth.

Every once in a while, we get an errant number like the revised second quarter GDP number of +3.7% to tease us into thinking that they know what they are doing. But once we look below the headline number, we find the same weakness that has plagued the economy since the financial crisis. Years of ZIRP and QE have suffocated the economy in too much debt that will continue to smother growth for years to come.

The Fed continues to speak out of both sides of its mouth, when its best course of action would be to say nothing. On Wednesday, New York Fed President Bill Dudley sought to calm markets by saying that the case for a September rate increase was “less compelling.” On Friday, Fed Vice Chair Stanley Fischer said that a September hike was still a possibility.

Market Manipulation is Not Leadership

Leaving aside the bathos of the market’s pathological concern regarding a miniscule 25 basis interest rate hike, the Fed’s contrasting messages are unsettling the market when they are ostensibly intended to do the opposite. The Fed governors aren’t idiots, so why are they acting like ones?

A week ago, stocks plunged by 6% after China – acountry even more debt-engorged than the United States – began to devalue its currency. Last Monday, investors panicked and sent the Dow Jones Industrial Average down 1,100 points at the open. This move, which ended with the biggest one-day loss in history, was exacerbated by changes in market structure that increase volatility and reduce liquidity.

The Dow lost 1,300 points between Friday, August 21 and Tuesday, August 25 before recovering 1000 of them on Wednesday and Thursday, August 26 and 27. The volatility was historic, with the Chicago Board Options Exchange Volatility Index (VIX) spiking to levels that we haven’t seen in years. After hitting 44 on Monday, the VIX settled down to close the week at 26.05, much higher than the average levels in the mid-teens that have prevailed over the last two years. After four years without a 10% correction, investors were given a much-needed reality check.