3 Things – Fed Mistake, ECB QE, Housing

The Fed May Be Making A Mistake

On Wednesday, the Federal Reserve made their latest monetary policy announcement. Janet Yellen, the current Chairwoman, made several statements that led the markets to believe that they remain on course for increasing the overnight lending rate this year. 

*FED SAYS ECONOMY HAS BEEN  `EXPANDING AT A SOLID PACE’

*FED CITES `STRONG JOB GAINS’ AND LOWER UNEMPLOYMENT RATE

*FED SAYS INFLATION EXPECTED TO DECLINE FURTHER IN NEAR TERM

However, the real state of economic expansion, as discussed yesterday, is highly questionable as the global deflationary forces have already begun to wash back onto domestic shores.  While the Federal Reserve stated they were not worried about the decline in oil prices, as it boosts disposable household incomes, it is a point that they should reconsider since there is little evidence supporting that claim.

In addition, the strong job gains, as examined earlier this week are also quite suspect.  Given that the employment numbers are likely extremely overinflated, which accounts for the extremely low labor force participation rates and declining wage growth, the negative feedback loop to employment could occur very quickly.

The real concern for investors and individuals is the actual economy. There is clearly something amiss within the economic landscape, and the ongoing decline of inflationary pressures longer term is likely telling us just that. The big question for the Fed is how to get out of the potential trap they have gotten themselves into without cratering the economy, and the financial markets, in the process.

It is my expectation, unless these deflationary trends reverse course in very short order, that if the Fed raises rates it will invoke a fairly negative response from both the markets and economy.  However, I also believe that the Fed understands that we are closer to the next economic recession than not.  For the Federal Reserve, the worst case scenario is being caught with rates at the “zero bound” when that occurs. For this reason, while raising rates will likely spark a potential recession and market correction, from the Fed’s perspective this might be the “lesser of two evils.”