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Damned If They Do And Damned If They Don’t – Ep. 196

  • This morning the Federal Open Market Committee began its 2-day meeting, where they’re supposedly going to discuss raising interest rates for the second time
  • We’re going to get the official announcement of their decision on Wednesday
  • Most likely there will be no surprise, that they won’t raise interest rates
  • But it will be the statement at the press conference that follows; that’s typically where you can get more market-moving insights
  • I said they’re supposedly going to be discussing whether or not they are going to raise rates, but you would think that if they were going to raise rates, they’d know it before the meeting started
  • But I don’t think they’re going to discuss whether or not they’re going to raise rates; I think they know they’re not going to raise rates
  • What they’re going to discuss is the bind they’re in
  • It’s like they’re damned if they do and they’re damned if they don’t
  • On the one hand, market expectations went way up for a while, on a September rate hike
  • Based on Janet Yellen’s Jackson Hole speech, where she said, “The case for a rate hike had strengthened.”
  • Then later that day, another Fed official reiterated that there was nothing in Janet Yellen’s speech that would rule out a rate hike in either September or December or both!
  • Based on that, market expectations ramped up
  • Of course, the Fed also claims to be data dependent, and the data over the past month has been lousy
  • Even though the Fed has not gone out of its way to recognize the bad data, probably for political reasons
  • The data has been bad, so the case for a rate hike has weakened, although Janet Yellen herself has not uttered those words
  • You’ve had some other Fed officials come out and pay lip service to that effect more recently because the market started to fall so the doves came flying to the rescue to save the market
  • But here’s the conundrum: if they don’t raise rates, which I think is the more likely option, then the Fed will have cried wolf again
  • If they do raise rates, it belies Janet Yellen’s “Data Dependent” credo
  • In reality, they should be raising rates regardless of the data, because rates are too low
  • These low rate are creating a problem
  • It doesn’t matter whether the economy is weak or strong, rates need to go up
  • In fact, I would argue that the economy is weak because rates are so low
  • Rates have to go up before we can have a real recovery
  • Of course, before we can have a real recovery, we have to prick this bubble and end the phony recovery
  • To have real economic growth, we’re going to have to have a crash first
  • If we want the gain, we have to endure the pain
  • But nobody wants the pain so we never get any gain
  • If the Fed were to raise rates despite the data, it looks like they’re not data dependent
  • If they don’t raise rates without acknowledging that the data is weak
  • If they continue to pretend that the economy is fine, and continue to hint at future rate hikes
  • The Fed loses more credibility
  • That is what they are more likely to do: why would they take a chance on raising rates on Wednesday
  • Knowing A) How weak the data is, and  B) knowing that it is possible that the markets could tank as a result of that hike
  • That’s the last thing they want, because, then what are they going to do?
  • How are they going to reverse the decline? Cut rates?
  • Clearly the Fed wants to punt again and delay the decision to December
  • This will mean that they barked again but they didn’t bite
  • That’s what they’re talking about: “How do we thread this needle? How to we make the perfect statement that will still pretend the recovery is on track and still justify not raising interest rates?”
  • “We have to still say we’re data dependent and keep the prospect of a rate hike alive for December.”
  • I think that is a dangerous strategy
  • If the Fed is successful in saying we’re not going in September but we’re probably going to go in December
  • I don’t think the market’s going to like that
  • Just a couple of months is not going to do it
  • If the only reason the Fed is not hiking is because of the election, and once the election is over, the hikes are going to start, and the Fed is going to start hiking rates more in 2017, the markets are going to tank
  • I think what the Fed really has to do, is not only not raise rates in September but reduce the expectation for a rate hike in December, all without undercutting the narrative of economic recovery, yet claim to be data dependent
  • We’ll see if they go that route, they would have to say to everybody, “This is the last hike.”
  • They would have to take all future rate hikes off the table to take the sting out of that hike
  • But I think this is a dollar-negative event
  • I think this is a gold-friendly event
  • The last time the Fed raised interest rates everybody thought that was it – gold would tank
  • Instead it marked the bottom and we had a huge rally
  • I think the market will react to the next rate hike in the same way
  • More and more traders are looking beyond the hikes to the cuts, realizing that any hike is a prelude to a cut
  • The only reason the Fed is hiking rates is so they can cut them, so it doesn’t even matter if they raise rates because they are not going to stay high for long
  • Another data point that came out making people think that the Fed is close to a rate hike was the CPI data that came out on Friday
  • That’s the other data point the Fed is supposed to look at – higher inflation
  • The Fed wants higher inflation because it is a sign that their policies are working
  • But, darn it, inflation remains stubbornly low, so the Fed can’t do what they say they want to do
  • This is actually the nightmare scenario for the Fed
  • The last thing the Fed wants is higher inflation, in fact, even if inflation is higher, the Fed hopes the government covers it up with their phony CPI numbers