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Weekend Reading: The Fed’s Dilemma

Written by Lance Roberts | Mar, 23, 2018

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The Fed’s Dilemma

The confusion at the Fed continues.

On Wednesday, Jerome Powell justified hiking rates 0.25%, while maintaining their projections of two further hikes this year, by painting an upbeat picture of the U.S. economy.

Such may have been the case in January when the Atlanta Fed sent the current Administration into a “tizzy” with a pronouncement of 5.4% economic growth in the 4th quarter, but not at 1.9% currently. Furthermore, as I discussed just recently:

“Since 1992, as shown below, there have only been 5-other times in which retail sales were negative 3-months in a row (which just occurred). Each time, the subsequent impact on the economy, and the stock market, was not good.”

“So, despite record low jobless claims, retail sales remain exceptionally weak. There are two reasons for this which are continually overlooked, or worse simply ignored, by the mainstream media and economists.

The first is that despite the “longest run of employment growth in U.S. history,” those who are finding jobs continues to grow at a substantially slower pace than the growth rate of the population.”

“Secondly, while tax cuts may provide a temporary boost to after-tax incomes, that income boost is simply being absorbed by higher energy, gasoline, health care and borrowing costs. This is why 80% of Americans continue to live paycheck-to-paycheck and have little saved in the bank.”

The Fed’s dilemma is quite simple.

The Fed must continue to “jawbone” the media and Wall Street as economic growth has continued to remain sluggish. As shown, the Fed continues to remain one of the worst economic forecasters on the planet.

While the Fed is currently “hopeful” of a stronger 2018 and 2019, they are likely once again going to be very disappointed. But in the short-term, they have little choice.

Unwittingly, the Fed has now become co-dependent on the markets. If they acknowledge the risk of weaker economic growth, the subsequent market sell-off would dampen consumer confidence and push economic growth rates lower. With economic growth already running at close to 2% currently, there is very little leeway for the Fed to make a policy error at this juncture.

The Federal Reserve has a very difficult challenge ahead of them with very few options. While increasing interest rates may not “initially” impact asset prices or the economy, it is a far different story to suggest that they won’t. In fact, there have been absolutely ZERO times in history that the Federal Reserve has begun an interest-rate hiking campaign that has not eventually led to a negative outcome.

The Fed understands economic cycles do not last forever, and after nine years of a “pull forward expansion,” it is highly likely we are closer to the next recession than not. From the Fed’s perspective, hiking rates now, even if it causes a market decline and/or recession, is likely the “lesser of two evils.”

Here is your weekend reading list.

Markets

Congress quietly formed a committee to bail out 200 pension funds (The Sovereign Man)

Financial ‘fragility’ could threaten more retirees in coming years (USA Today)

66% Of Working U.S. Millennials Have Nothing Saved For Retirement (Forbes)

65% of Americans save little or nothing – and half could end up struggling in retirement (CNBC)

Two dreaded words – mean reversion – take hold of the U.S. stock market (MarketWatch)

U.S. Stock Market – The Flight to Fantasy (Acting Man)

The stock market meltup is over: Morgan Stanley (Marketwatch)

Goldman Sees ‘Financial Fragility’ Rising in Markets (Bloomberg)

A Dow Theory sell signal could trigger a selling avalanche (MarketWatch)

The Fed Is Now A ‘Wet Blanket’ For Stocks (Forbes)

Democrats plan crackdown on booming stock buybacks (CNNMoney)

Fed Chair Powell warns some asset prices are ‘elevated’ including stocks (CNBC)

Bill Gross: The Fed won’t be able to hike rates as high as they’d like (CNBC)

Are You Sure Oil Is A Good Bet? The Previous Slump Lasted About 100 Years (Forbes)

New Home Sales Decline 0.6%, Near Expectations, Prices Jump (Mike “Mish” Shedlock)

Volatile Periods Can Produce Satisfying Returns (Chris Ciovacco)

Economy

Fed raises rates, signals confidence in strengthening economy (Reuters)

How Powell Might Keep the Party Going Longer (Marketwatch)

For consumers with credit-card debt, Fed rate hike will sting (Marketwatch)

How The Fed Rate Increase Impacts Credit Card Debt (Forbes)

Stephanie Pomboy: How the Fed Will Trigger the Next Crash (Barrons)

What boom? The U.S. economy is off to a ‘meh’ start to 2018 (CNN Money)

Ultimate Indicator (Fertility) Suggests U.S. Never Recovered From the Great Financial Crisis (Econimica)

How commodities may be signaling a global economic slowdown (Marketwatch)

‘Global Synchronous Recovery’ Narrative Crushed As US, EU PMIs Plunge (ZeroHedge)

The Manhattan Luxury-Home Market Is Screaming: I’m Overpriced! (Bloomberg)

San Francisco is so expensive that more people are leaving than moving in (Business Insider)

Californians Flee The State In Droves Over Taxation And Housing Costs (SHTFPlan.com)

Facebook, Uber and the end of the Great American Tech Delusion (Asia Times)

The Four Triggers For The ‘Big Data’ Bubble To Burst (ZeroHedge)

Look No Further Than U.S. Corporate Debt for Libor’s Next Victim (Bloomberg)

Guggenheim’s Minerd: “Zombie Companies” Will Be Crushed By Rising Libor (ZeroHedge)

Guggenheim’s Scott Minerd Sees Defaults, U.S. Recession on the Horizon (Bloomberg)

Goldman Sachs CEO Lloyd Blankfein says sovereign balance sheets look risky (Reuters)

Janus’ Gross says U.S., global economies too leveraged for aggressive Fed (Reuters)

Americans’ Economic Expectations Match Highest Level Since 2002 (Bloomberg)

Central Bank Money Rules the World (Daily Reckoning)

The Central Bank Bubble: It Will Be Ugly (Gold Telegraph)

$21 Trillion And Counting: Why This Time The Fiscal Wolf Is Really At The Door (David Stockman)

The Next Recession Might Be Worse Than the Great Depression (John Mauldin)

An aging workforce and automation might be creating an economic storm (John Mauldin)

Trump Launches $50bn in Tariffs, Says China is “Out of Control” (Mike “Mish” Shedlock)

At $21 TRILLION, the national debt is growing 36% faster than the US economy (The Sovereign Man)

US Gross National Debt Spikes $1.2 Trillion in 6 Months, Hits $21 Trillion (Wolf Street)

Mr. Market Has a Hissy Fit Over Tariffs That Haven’t Happened (Naked Capitalism)

New Budget Announces Spending Spree (Economics21.org)

Earlier on Real Investment Advice

The Growth and Inflation Scare of 2018 (Peter Cook, CFA)

PIMCO: “New Neutral” Mostly Intact (John Coumarianos)

Nomi Prins: The Fed & The Global “Collusion” (Lance Roberts)

The Debtor’s Prism (Lance Roberts)

A Day At The Beach, Part 1 (John Coumarianos)

A Day At The Beach, Part 2 — Global Asset Allocation (John Coumarianos)

Fasten Your Seat Belt, Turbulence Ahead (Michael Lebowitz)

The World’s Most Misunderstood Investment – Part 1 (Richard Rosso)

FB, AMZN, GOOG – “Too Big To Fail?” (Doug Kass)

Crude Oil Breaks Out, But Will It Last? (Jesse Colombo)

Technically Speaking: The “Walking Dead” Market – 3000 or 1500? (Lance Roberts)

Recession: When You See It, It Will Be Too Late (Lance Roberts)

Has The Market Already Peaked For 2018? (Doug Kass)

Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” 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, Linked-In and YouTube

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2018/03/23