All Eyes on the Fed This Week

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The Aussie political upheaval was a nice distraction this week.

But there’s a much bigger problem facing the markets.

That is, will they or won’t they raise rates?

I’m talking about the Federal Reserve Bank in America.

Late Thursday night Melbourne time, the central bankers will get together and decide on what to do with America’s cash rate.

It may seem premature, but the Fed ain’t raising rates. And I’ll explain why in moment.

Since June this year, the boffins on Wall Street were sure that September was the month that the Fed would decide to lift rates.

Before that, they were sure it was June this year that the cash rate would increase.

And earlier in 2015, the pinstripe suits were calling March as the time the Fed would take action.

Guess what? Every single time someone’s been sure a rate rise was coming, it hasn’t happened.

And the now all important month is here, another voice has suggested that December is far more likely.

According to Bloomberg:

Yet the probability of such a move as gauged by federal funds futures contracts, a bellwether for traders for decades, is 28 percent, signalling fewer people in that market are buying the argument that a tightening is just days away.

Aaron Kohli, an interest-rate strategist with BMO Capital Markets says, ‘The reason for the low probabilities is that you have a fairly large subset of investors who are betting the Fed won’t move until next year.

Kohli is one of the 22 primary dealers trading with the Fed.

In spite of the constant speculation, the Fed isn’t going to raise rates this year.

You may think that’s an awfully confident statement coming from someone who doesn’t work with central bankers.

But I was recently invited to work with Jim Rickards on his first ever Australian subscription service, Strategic Intelligence.

Part of coming onboard has been sifting through some of Jim’s extensive previous articles.

I’ll be honest, I’ve been surprised just what I’ve unearthed.

Like this interview he did with CNBC in 2014.

Even back then — when Wall Street was hot under the collar about a looming rate rise — Jim was confident there wouldn’t be one. When asked about a rate rise in 2014, he told CNBC, ‘I don’t even see it. I would say pushed back into 2015. I would say pushed back into 2016. I don’t see a rate increase next year.

Take the time to watch the video. When you do, you’ll’ notice what Jim explains over a year ago is applicable today.

In the interview Jim briefly explains why the Fed won’t raise rates. The reason is, economic growth’s been roughly the same for the past five years. He says the US economy is fundamentally too weak support a rate increase. And the strengthening US dollar has a similar effect to a rate increase.

But more importantly, he talks about the American market still being in a depression.

Now, not many people realise the American economy is in a depression. This is where Jim is different. When he makes this claim, Jim reckons people often say ‘What depression? There’s no queues for work or food rations. How can the American economy be in a depression?’

As Jim mentioned said to CNBC, ‘Depression doesn’t mean continuous falling GDP, it just means GDP below trend.’

Just recently, Jim explained in detail with an interview with Investment Watch what defines a depression.

Firstly, Jim explains what an economic recovery looks like:

A normal cycle of recovery, which we’ve seen thirty or more times since the end of World War II. The way it works is the economy gets a little overheated, unemployment goes down, job market gets tight, inflation starts to pick up a little bit, and the Fed looks at that and they worry about it getting out of control so they tighten interest rates. That cools things down, unemployment goes up, prices level off, interest rates come down, and then it kind of hits bottom. Then the Fed says, “Okay, time to dial it up again” and then they ease, and then we go back up again.

In simpler terms, he reckons that monetary policy for an economy is similar to heating and cooling your house:

It’s just like the thermostat in your house. If the house is too cold you dial it up, if the house is too warm you dial it down, and somehow you try to keep it on an even keel but you’ve always got that thermostat if you need to adjust things. The thermostat is the Fed. That’s the normal business cycle, the normal credit cycle, bull and bear markets track that with some leaps and lags. That’s the environment that everybody is familiar with.

That’s not the environment we’re in.

We are not in a normal self-sustaining cycle of recovery.

If we were we would have had much stronger growth by now, and the Fed interest rates would be two, three percent, maybe higher, inflation would be higher, a lot of things would be very different than they are right now. We’re in a depression.

It’s not that you have declining growth it’s that you have a long period of growth below potential. That’s the definition of a depression.

Jim is one of the few people to admit that the American economy is in a depression.

And that depression is the reason that the Fed won’t raise the cash rate this week.

Regards,

Shae Russell

Editor, Strategic Intelligence

Ed Note: The above article was first published in Money Morning.

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The Daily Reckoning offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, The Daily Reckoning delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors. Founded in 1999, The Daily Reckoning is published in 7 countries with a worldwide readership of almost 1 million people.
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