Over, and over we have heard one excuse of late for not raising interest rates that exemplified just how precarious the entire financial house-of-cards truly sits e.g., “International developments.”
When the Federal Reserve first used this term some (which I was one) took umbrage with the stance. It was near unconscionable to me that the Fed. would set as a condition “international” concerns or developments as to overshadow, if not preclude itself from enacting prudent U.S. monetary policy, leaving the U.S. economy to languish ever the longer in economic stagnation.
Yet, as long as the “markets” bought it (and they did and have hands over hooves!) it seemed “international” was just the ticket to kick-the-can rather than pull-the-punchbowl. And the “bubbly” continues to bubble in a way that’s ominously reminiscent of times past. (i.e., the 1920’s, 30’s, and 90’s)
So now here we are, again, at the opening of another Fed. meeting where the odds of a rate hike now stands at about 100% as far as Wall Street, and most others are now concerned. And the “markets” reaction to all this? All time record highs made not once, not twice, but now it’s a daily occurrence.
So now would it not be fair to say the Fed. has its “cause and effects” models backwards? e.g, Rate hikes are now good? And if the Fed. interprets it (“it” being hikes are now market movers to the upside) as just that – why would (or should) they stop at just one or 2 more in 2017?
I know, don’t laugh, but if you use the same logic as the Fed. has over the years – it’s not out of the realm of possibilities. And for clues to show just how fast strongly held convictions can change? Just look at how fast an uber dove or hawk like Fed. presidents Eric Rosengren or James Bullard have changed their stance when it came to incoming economic data or signals. It’s getting harder to keep up which is now a dove, hawk, or somewhere in-between. So much for “strongly held convictions” I guess.
So here lies the real question:
In the midst of, and during, the transition timeframe of a new administration; with its new economic team, plan and agenda; where the fiscal policy that the Fed. has been desperately seeking and calling for is not only being proclaimed, but the markets appear to be reacting more than favorably too just that. Again; where that “market” rally (an all-time-record rally no-less) along with other metrics (government agency supplied that is) are beginning to finally show movement towards Fed. stated objectives (i.e., inflation, etc.)
The Fed. is going to throw cold water over all of it?
Raising rates causing carrying costs globally to soar; the $Dollar to most assuredly do the same; causing debt holders (think China just for starters) to further increase (as in dump) holdings in order to try to hold any semblance of stability in their own currencies and much, much more. Not to mention the turmoil in already teetering economies (think everything E.U. just to start.)
Wednesday is the day? And not a moment too soon or later will do? Am I the only one who sees a “political” problem about to happen here? Let alone possible “international” monetary repercussions to boot?
I can’t make this conundrum strongly enough:
It is within this backdrop that the Fed. is to now decide it can’t wait another 30, 60, or 90 days to at least fully understand the impact, wherewithal, and/or soundness of the incoming administrations fiscal policies, to at the very least, adjust, or set monetary policy appropriately?
Rather, it will err on the side of possibly totally misjudging or making a mistake where X (being Trump’s fiscal plans or ideas) was thought to occur only to have Y (as in the now the stated position from the House and Senate) where X may not happen as the “markets” now think?
Too that uncertainty – leaving (or creating) the possibly of needing a complete reversal of monetary policy? (Imagine all this “good” suddenly becoming “Everyone to the exits!”) Not to mention the global currency turmoil it may unleash. (That’s on top of the ever-growing stresses currently.)
Too all of this – the Fed. can’t wait one more meeting? Can’t wait till at the very least a new presidential team gets seated?When it could (and has) stopped-on-a-dime when an “international development” took place?
Hence lies the real crux of the Fed’s current dilemma. i.e., Nothing has turned out as they thought, or planned. Not only does any current decision have just as much of a chance of being wrong. They all could have catastrophic consequences. And by all, I mean just that – all.
Today raising, as well as not, could result in the same outcomes. i.e., Being seen as “crying wolf one too many times” may have the same impact globally (i.e., more expedient demands for de-$Dollarization) which may filter right back into U.S. economic turmoil possibly – just as fast as raising into the teeth of what can only be called “uncertainty.”
Gee – Who’d a thunk it?
If the Fed. does indeed raise rates there will be two places to watch for immediate outright fury and repercussions.
One – will be China. Bet on it.
Second – will be president-elect Donald J. Trump. You can double down on that!
© 2016 Mark St.Cyr