If the Fed was going to raise at its Dec. meeting, then why is the Dow Jones index up 180 points since the 2pm announcement on Wed?
- The guidance from the Fed staffers says the US economy is evenly balanced at 0% rates, the equilibrium is what the Fed has used to even out the growth vs inflation battle it wages.
- Since the meeting minutes were taken, Japan has entered its fifth recession since 2008 with the last two quarters producing negative growth.
- Europe, which has been teetering on the brink of recession will be pushed negative this quarter due to reduced economic activity from terrorism, think tourism spending.
- As Europe slips into recession ECB chief Mario Draghi will need to ramp up EQE to spur growth.
- And between now and Dec. the Chinese will probably cheapen the yuan again to combat its slowing growth.
Now what does that say about the future of rate increases?
It puts the Fed in a difficult situation since it would be forced to raise rates in an election year if they stay pat in Dec. Something the Fed has not done in some time.
I’ve been saying for sometime there would be no rate hike in 2015 and perhaps one in 2016 in the spring. And still profess that a Dec. rate hike midway through the month would be a horrible idea.
The markets by Dec. 18 are in full “window-dressing mode” meaning all financial advisers and traders are cleaning up the books for the year, by selling the dogs in the portfolio.
What all this activity means is a lack of liquidity in the market at the precise moment you need it the most.
So what, the Fed will raise a quarter point on Dec.18th and then along with Treasury issue a credit facility for market-makers in the bond pits on the 19th to facilitate trade as a worse-case scenario?
Listen, a quarter point rise should not be that big of a problem, but when the last rise was eight or nine years ago, it’s bigger than you think.
There are thousands of traders and FAs, who have never worked in the industry during a rate rise environment, funny as that may seem.
Not to mention the currency war a rate rise will cause. China, Japan and Europe our major trading partners are going the other way on the economic scale, so for the Fed to raise would mean a much stronger dollar, crippling our trade balance and slowing growth here.
So that’s the handful of reasons for the Dow rise. It’s a Santa Claus rally before the turkey is carved, knowing that Yellen and the Fed are jawboning or rather wish-boning.