Janet Yellen, in my opinion, is about to make a critical mistake. She is not going to raise rates in July.
Why is this a mistake? Simple. No matter when you think there will be an economic recession, there will eventually be one. As I have repeatedly stated, the biggest problem for the Federal Reserve has been getting caught at the “zero bound” of interest rates during the onset of a recessionary contraction. Such a combination of events would leave the Fed without a very valuable monetary policy tool.
Come July, Janet Yellen and the FOMC are going to once again “punt” hiking interest rates in favor of waiting for “global instability” due to the “Brexit” to subside. However, as stated this is a mistake for a couple of reasons.
First, with the markets making new all-time highs, there is a “price” cushion available for the markets to absorb a rate hike without breaking important downside support as shown below.
Secondly, with Central Banks globally flooding the markets with liquidity, as discussed yesterday, a further “shock absorber” is currently engaged in softening the impact of a rate hike.
“But, for now, a rash of global Central Banks continue to support asset prices by increasing accommodative policies either through additional reductions in interest rates or direct injections of liquidity. As Matt King from Citi recently noted:
‘It has been a surge in net global central bank asset purchases to their highest level since 2013.’”
Lastly, the economy is likely going to show a bit of “strength” in upcoming reports, with slightly stronger inflationary pressures. This pickup in economic strength will be another inventory restocking cycle following several months of weakness. As has been in the past, it will be transient and that strength will evaporate as quickly as it came.
If I was Janet Yellen, I would hike interest rates by .50 bps immediately in a surprise announcement and use the price and Central Bank liquidity cushions to soften the blow. This would move the Fed towards its goal of reloading its primary policy tool while there is some ability to temporarily control the outcome of the rate hike.
But that is just me. She won’t do it.
Instead, she will pass on hiking rates at the upcoming meeting with promises of rate hikes to come before the end of the year. Unfortunately, for her, this is the “trap.”
The liquidity will dry up, the inventory restocking cycle will end, and the next “crisis” will be on the horizon with Ms. Yellen remaining stuck near the “zero bound.”
The past opportunities to “normalize” interest rate policy have come and gone. This opportunity will likely pass also and, as always, the Fed will realize far too late they are trapped. But by then, it won’t matter much to investors, or what’s left of them, anyway.
For now, here is your reading list for the weekend.
“The stock market is like a wife. When you come home you never know if you will be greeted with a kiss, or hit with a frying pan.” – C. Vern Myers
Fed & Economy
- Fed Mouthpiece: Helicopter Money Next by Lee Adler via Wall Street Examiner
- Fed Needs To Stop Being A Wuss by Tim Mullaney via MarketWatch
- Crisis Is Us by David Stockman via Contra Corner
- Economic Data Is Confusing by Joe Calhoun via Alhambra Partners
- Jobs Report Confirms Slowing Economy by Louis Woodhill via Real Clear Markets
- Anemic Growth = New Normal by George Will via IBD
- The Deep Causes Of Today’s Struggling Economy by Ryan Murphy via NCPA
- Art Cashin: The Rallies “Conspiracy Theory” by Bob Bryan via Business Insider
- Bull Market Blues by Paul Krugman via NY Times
- Everything Is Horrible, Stocks Love It by Matt Phillips via Quartz
- Don’t Sell Dull Market Short by Mark Hulbert via USA Today
- Why Earnings Estimates Are A Joke by Jeff Reeves via MarketWatch
- Welcome Our New Algo Overlords by Ronald Baily via Reason
- It’s Only A Matter Of Time Before Global Melt Up by Avi Gilburt via MarketWatch
- Stocks Hit New Highs, Different This Time? by Matt Krantz via USA Today
- Ignore The Bond Market Alarm Bells? by Neil Irwin via NYT
- This Stock Market Rally Isn’t Like The Others by Akin Oyedele via BI
- S&P At New Highs, Don’t Party Just Yet by Michael Kahn via Barron’s
- What Will Cause The Next Crash by Chris Vermeulen via The Street
- What Is Dow Theory Saying Now? by Mark Hulbert via MarketWatch
My Faves & Raves
- Commercial R/E Checks Into Heartbreak Hotel by Danielle DiMartino-Booth
- Why 2016 Is The Top For Housing Prices by Mark Hanson via MHanson.com
- 3 Red Flags Of The Housing Market by Tyler Durden via Zero Hedge
- Slow Suffocation by Buttonwood via The Economist
- Death Of The Risk Free Rate by Chris Brightman via Research Affiliates
- Race To The Bottom by John Hussman via Hussman Funds
- 10 Stupid Retirement Tricks by Judy McNary via Investopedia
- Here Be Dragons by Ted Rivelle via TCW
- The Case For Absolute Return by Axel Merk via Merk Investments
- The Hope Trade Has Returned by Jeffrey Snider via Alhambra Partners
- The Biggest Fed Power Grab Yet by David Stockman via Contra Corner
- July Not Likely A Top. Watch September? by Dana Lyons via Tumblr
- The Great Dichotomy by Jesse Felder via The Felder Report
“Half the plowing is in the planning.” – Arthur Cutten
Questions, comments, suggestions – please email me.
Lance Roberts is a Chief Portfolio Strategist/Economist for Clarity Financial. He is also the host of “The Lance Roberts Show” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report”. Follow Lance on Facebook, Twitter, and Linked-In