Another US Federal Reserve Bank meeting has come and gone. Quite frankly, this one was as boring as the last.
It’ll come as no surprise to you that the Fed didn’t raise interest rates.
Many Aussie investors find it frustrating that America’s central bank gets so much airtime here. But there’s a reason for that.
While Australia is a small economy, the global markets are interlinked.
More than ever before, international monetary policy greatly affects Australian investors. I’ll explain more on what this means for you shortly.
But first…let’s look at the outcome of October Fed meet.
Apparently, the ‘rate hike’ talk has shifted from September to December.
According to Bloomberg:
‘The Federal Reserve policy makers say they will consider tightening policy at their next meeting in December.
‘The Fed removed a line from September’s statement saying that global economic and financial development “may restrain economic activity somewhat ,” saying only Wednesday that the central bank is monitoring the international situation. The committee also added a reference to the possibility of increasing the rate “at its next meeting” based on the “realised and expected” progress in reaching goals.’
Shortly after the Fed released the minutes, futures contracts showed a 43% possibility of a December rate increase. Up from 34% prior to the October meeting.
In a separate Bloomberg article, the basis for the rate increase will come from a change in one of the Fed’s economic models:
‘The Federal Reserve Board released an updated version of its large-scale model on the US economy that may hold clues into why policy makers pivoted at their meeting earlier this week toward a December interest-rate increase.
‘The revised inputs and calculation on Friday suggest the economy will use up resource slack by the first quarter of 2016, according to an analysis by Barclays Plc, and that also indicates Fed staff lowered their near-term estimate for how fast the economy can grow without producing inflation – a concept known as potential growth.’
Contrarian investment analyst Jim Rickards — the strategist of Currency Wars Trader —says all the Fed’s models are wrong.
In addition there’s a reason why the economists who forecast Fed movements are incorrect.
Jim told Modern Wall Street in an interview last week that ‘Their [Fed’s] forecasting models are deeply flawed and obsolete’. Simply, the data used to assess the American economy doesn’t work.
Not only that, but Jim says the reason why so many economists get it wrong is ‘because they’ve either been trained by the Fed, or went to the same schools as Fed [members] where they’ve had the same professors.’
In contrast to Bloomberg — and the majority economists — Jim tells us there’s no rate hike coming in December. Instead, there’ll be a shift back towards easing monetary policy.
Weak economic data aside, you just need to look at the recent quantitative easing (QE) timeline to see what’s coming.
QE2 ended in June 2011 and QE3 started in September 2012. There were 15 months between the start and finish of the two rounds of stimulus.
Now QE3 ended in November 2014.
Fifteen months from November 2014 is…March 2016. And it’s March next year that Jim reckons the Fed will start easing monetary policy again.
The Fed has five options:
- Fire up those printing presses and start money printing again.
- Establish negative interest rates — although this is highly unlikely.
- ‘Helicopter money’. This is where the US runs bigger budget deficits and the Fed buys the bonds. Jim calls it money printing with a purpose.
- Currency wars — that is, cheapen the US dollar at all costs.
- Forward guidance. This is the move Jim believes the Fed will opt for come March next year.
Forward guidance is essentially nothing more than talking to the market.
You may remember that up until March this year, the Fed used the word ‘patient’ in its press releases. Since March, the Fed dropped this and went for ‘tough talk’. With this change in language they were leading the market to believe a rate rise was on the cards for this year.
Well, this year is 11 months old and there’s been no shift in rates. And I’ll go on the record here to tell you that there won’t be a change at the next December meeting.
Instead, they Fed will go back to easing come March 2016. Or as Jim says, ‘The Fed will open the thesaurus and look up a synonym for patience.’
In other words, via forward guidance, the Fed will resort back to talking softly to the markets.
For the Reserve Bank of Australia (RBA) however, this presents a problem. An easing bias in the US is likely to weaken the US dollar. Should the Fed ‘talk’ the US dollar down, it will push the Aussie dollar higher.
The RBA has been lowering interest rates in part to keep the Aussie dollar low. The lower our currency is, the more attractive our exports become to other markets.
However, as the US dollar weakens, the RBA will be forced to cut rates further in order to keep our currency competitive.
This means the currency wars are going to get hotter next year. Jim and I spend countless hours studying these wars for subscribers of Currency Wars Trader. Our aim is to predict what the next moves will be by the central banks of the world’s biggest economies. Knowing what these moves are ahead of time gives you a great advantage as an investor.
You can find out more about our work here.
Editor, Currency Wars Trader