‘The Fed will not raise interest rates. That’s something I’ve said for a long time.’
This statement is familiar to subscribers of Strategic Intelligence. It sounds exactly like something, their strategist, Jim Rickards would say.
In fact, it’s exactly what he said to the ABC on the Monday night before the Liberal party changed leaders.
As most Aussies were tweeting ‘libspill’ memes, Jim was chatting to The Business about the implications of the looming Federal Reverse Bank meeting this week.
I highly recommend you watch the interview.
Now, this interview took place before the September Federal Open Markets Committee. When you watch the interview, it’s clear that Jim was confident there’d be no rate increase from the Fed that month.
However, he did discuss something called the ‘October Surprise’.
Now the Fed meets eight times a year. But they only hold a press conference four times a year. As a general rule, the Fed tends to raise rates at the same time a press conference is scheduled.
After this last meeting, the Fed won’t have another press conference until December this year.
Yet, as Jim explains in the interview, last year the Fed had a teleconference practice run during the Northern hemisphere spring.
The markets — and most in the mainstream for that matter — wouldn’t expect it because there’s no scheduled press conference. Hence, the October surprise.
At the time, Jim felt the Fed may risk saving face and dump an October Surprise on the US market.
In saying that, he believes any rate rise this year is unlikely. 2016 is still a possibility, however, as Jim explained to subscribers of Strategic Intelligence on Wednesday, the Fed have until March 2016 if it’s dependent on economic data.
While Jim’s telling you to look out for the unexpected, he reckons the Fed missed the boat to raise rates.
They could have done so gradually over 2010 and 2011. If the central bankers had used this opportunity to raise rates, there’d be room in the US economy to tighten monetary policy today.
The fact is, they didn’t.
Today the US is faced with frail economic numbers. Jim says the ‘Employment rate has come down, but labour force participation is lousy. The labour force declined last month and real wages are going nowhere. In fact, monthly job creation is going nowhere. If you look at the data behind the happy talk, the [economic] data is very weak in the US.’
As a result, Jim believes the Fed has five choices.
- Fire up those printing presses and start printing money once again.
- Establish negative interest rates. Although Jim thinks this move is highly unlikely.
- ‘Helicopter money’. This is where the US runs bigger budget deficits and the Fed buys the bonds. Money printing with a purpose, Jim calls it.
- The Fed changes its forward guidance. Since spring the Federal Reserve has put the ‘market on notice’ that a rate rise could happen at any moment. Jims says the Fed could change the talk to being ‘data dependent’ rather than this tough talk we get now.
- And the ultimate tool — currency wars. That is, cheapen the dollar at all costs. The problem — as Jim explains in the interview — is that this move will put pressure on countries like Australia and China that are trying to weaken their currencies.
In saying that, the Fed might have these choices, but Jim doesn’t see the Fed using them at this point.
However, the biggest take away from the ABC interview is what happens if the Fed doesn’t raise rates after all the tough talk.
Jim sees it coming down to either causing a meltdown in the US and emerging markets by raising rates, or accepting that they lose their credibility.
‘The Fed have to choose between their credibility or a catastrophe. People are saying if they don’t raise rates, when they’ve been talking it up for so long, they’ll lose their credibility. However the data is weak so if they do raise rates they’ll cause a catastrophe.’
Pushed on the point further, Jim tells the ABC: ‘They will have to leave their credibility in shreds to avoid a catastrophe. This is the price of manipulation.’
Editor, Strategic Intelligence
Ed Note: the above article first appeared as a Strategic Intelligence weekly update (16 September 2015)