There is an obsession in the marketplace over the date when the Fed will once again begin to raise rates. As if another 25 basis points is going to change the economics on tens of trillions of dollars of investments. But as we reflect on the issue more deeply, it becomes obvious that a minor bump in the fed funds rate will indeed change a great deal of economics all over the world.
No, it won’t do much to the cap rate on your latest real estate purchase, but it is likely to greatly affect the pricing of the currency and commodity markets. And those markets will affect corporate profits, which will affect the stock market. It’s all connected.
And what if the Fed has lost control? What if they are in a no-win situation where raising rates will cause reactions they don’t want, but not raising rates will result in equally unpleasant reactions?
A big part of the problem lies in what we analysts call divergent and convergent monetary policies. With Japan mounting an unprecedented quantitative easing attack on currencies everywhere and Europe getting ready to join in, with smaller nations all over the world lowering their interest rates, if the US were to raise rates, that move would strengthen the dollar even more. But that would mean even more deflation imported into the US.
Today we find that the headline CPI was -0.7% for January, coming on the heels of two previous months at -0.3%. The year-over-year rate slipped into negative numbers for the first time since October 2009, when we were still reeling from a deep recession. The Fed typically raises rates when it wants to lean into inflation, not when inflation is falling. Yes, I know that Yellen in her testimony and in recent Fed releases has said the Fed is confident that inflation will once again rise to 2%. And that, even if you take out food and energy, inflation has still risen at 1.6% over the last 12 months.
I want to thank Joan McCullough for allowing me to use the essay she wrote yesterday morning, which is the single best description of the dilemma facing the Federal Reserve that I’ve read in some time. It’s not all that long, and it has Joanie’s irreverent humor sprinkled liberally throughout, so it’s not only a short read, it’s fun.
So our economy will be impacted negatively not by official interest rates; the multinationals also come to mind for the stock pickers. Because we already know that the entire interest-rate, fiscal position, underlying economic metrics relationship has been decommissioned. By the tidal wave of printed money. That has us comin’ and goin’ at the moment. With the present “beneficiary,†the US Dollar. We started it. We flooded it. We yanked it back. It’s their turn now.
The situation with the Fed and its impact on the global economy is starting to get really interesting. I am really looking forward to my conference, where I will have both those who believe the Fed can control things and others who are equally convinced that the world is about to change profoundly no matter what the Fed does. I intend to get them up on the stage together and throw them raw meat – like the piece you are going to read today – and see what ensues. It will be fun theater; but even more importantly, it will help us understand the realities of the world we live in.
