Best of the Week
Most Popular
1. Gold vs Cash in a Financial Crisis - Richard_Mills
2.Current Stock Market Rally Similarities To 1999 - Chris_Vermeulen
3.America See You On The Dark Side Of The Moon - Part2 - James_Quinn
4.Stock Market Trend Forecast Outlook for 2020 - Nadeem_Walayat
5.Who Said Stock Market Traders and Investor are Emotional Right Now? - Chris_Vermeulen
6.Gold Upswing and Lessons from Gold Tops - P_Radomski_CFA
7.Economic Tribulation is Coming, and Here is Why - Michael_Pento
8.What to Expect in Our Next Recession/Depression? - Raymond_Matison
9.The Fed Celebrates While Americans Drown in Financial Despair - John_Mauldin
10.Hi-yo Silver Away! - Richard_Mills
Last 7 days
Stock Market Final Thrust Review - 19th Jan 20
Gold Trade Usage & Price Effect - 19th Jan 20
Stock Market Trend Forecast 2020 - Trend Analysis - Video - 19th Jan 20
Stock Trade-of-the-Week: Dorchester Minerals (DMLP) - 19th Jan 20
INTEL (INTC) Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 18th Jan 20
Gold Stocks Wavering - 18th Jan 20
Best Amazon iPhone Case Fits 6s, 7, 8 by Toovren Review - 18th Jan 20
1. GOOGLE (Alphabet) - Primary AI Tech Stock For Investing 2020 - 17th Jan 20
ERY Energy Bear Continues Basing Setup – Breakout Expected Near January 24th - 17th Jan 20
What Expiring Stock and Commodity Market Bubbles Look Like - 17th Jan 20
Platinum Breaks $1000 On Big Rally - What's Next Forecast - 17th Jan 20
Precious Metals Set to Keep Powering Ahead - 17th Jan 20
Stock Market and the US Presidential Election Cycle  - 16th Jan 20
Shifting Undercurrents In The US Stock Market - 16th Jan 20
America 2020 – YEAR OF LIVING DANGEROUSLY (PART TWO) - 16th Jan 20
Yes, China Is a Currency Manipulator – And the U.S. Banking System Is a Metals Manipulator - 16th Jan 20
MICROSOFT Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 15th Jan 20
Silver Traders Big Trend Analysis – Part II - 15th Jan 20
Silver Short-Term Pullback Before Acceleration Higher - 15th Jan 20
Gold Overall Outlook Is 'Strongly Bullish' - 15th Jan 20
AMD is Killing Intel - Best CPU's For 2020! Ryzen 3900x, 3950x, 3960x Budget, to High End Systems - 15th Jan 20
The Importance Of Keeping Invoices Up To Date - 15th Jan 20
Stock Market Elliott Wave Analysis 2020 - 14th Jan 20
Walmart Has Made a Genius Move to Beat Amazon - 14th Jan 20
Deep State 2020 – A Year Of Living Dangerously! - 14th Jan 20
The End of College Is Near - 14th Jan 20
AI Stocks Investing 2020 to Profit from the Machine Intelligence Mega-trend - Video - 14th Jan 20
Stock Market Final Thrust - 14th Jan 20
British Pound GBP Trend Forecast Review - 13th Jan 20
Trumpism Stock Market and the crisis in American social equality - 13th Jan 20
Silver Investors Big Trend Analysis for – Part I - 13th Jan 20
Craig Hemke Gold & Silver 2020 Prediction, Slams Biased Gold Naysayers - 13th Jan 20
AMAZON Stock Investing in AI Machine Intelligence Mega-trend 2020 and Beyond - 11th Jan 20
Gold Price Reacting to Global Flash Points - 11th Jan 20
Land Rover Discovery Sport 2020 - What You Need to Know Before Buying - 11th Jan 20
Gold Buying Precarious - 11th Jan 20
The Crazy Stock Market Train to Bull Eternity - 11th Jan 20

Market Oracle FREE Newsletter

Nadeem Walayat Financial Markets Analysiis and Trend Forecasts

One and Done Fed is a Wall Street Fantasy

Interest-Rates / US Interest Rates Sep 15, 2015 - 12:36 PM GMT

By: Michael_Pento

Interest-Rates

One of the current myths promulgated by Wall Street is that the Federal Reserve will raise rates once this year, breathe a sigh of relief, and be done until the "12th of never". But those who are familiar with our central bank's history are aware that the Federal Open Market Committee (FOMC) has never tightened the Fed Funds Rate just once. A quarter point hiking cycle has no historical basis and is just wishful Wall Street thinking.


In the spring of 1988 fearing a rise in core inflation, the Fed went on a tightening cycle that lasted from April 1988 to March 1989. During that time the Fed funds rate increased more than 300 basis points. This episode was followed by a recession beginning in 1990, suggesting that the corrective policy actions may have intensified a weakening economy, and that the Fed is prone to being economically tone deaf.

Then, during the fall of 1993, a rise in long rates represented a potential inflation scare and led the FOMC to raise the Funds Rate again another 300 basis points between February 1994 and February 1995.

And finally, as concerns over a potential housing bubble mounted, the Fed began to hike rates in June 2004 and continued through July of 2006, for a total increase of 425 basis points. Soon after, the subprime mortgage crisis was exposed and the Great Recession was in full throttle.

But we don't have to be Fed soothsayers to predict the planned trajectory of the Funds Rate; the Fed makes its intentions public during four of its eight scheduled meetings. During those meetings the FOMC provides us with a model of the members' expectations for policy rates in a chart known as the "dot plot."

While the FOMC is not bound by its "dot plot" predictions, it does provide insight into committee's monetary policy plans. The markets are aware of their intentions and will begin to price in future interest rates moves as soon as the Fed begins liftoff.

The latest dot plot shows that all 17 members of the FOMC believe the Federal Funds Rate should be under 1% by the end of 2015, with the median member seeing rates between 0.5% and 0.75%. That signals an end to ZIRP (zero interest rate policy). And although members differ on the level of rates at the end of 2016--with the median rate of around 1.6%--all members anticipate rates to rise throughout next year.

Therefore the market shouldn't expect to see a "one and done" move on interest rates because the Fed has told us not to anticipate one. The only reason overnight rates won't be moving above 1.5% by the end of 2016 will be if the unemployment rate moves higher due to a collapsing economy, which is not exactly good news for stock prices.

Furthermore, the Fed has worked very hard to be unconstrained by time; it has substituted the word "patient" for the phrase "data dependent." Therefore, when the Fed raises rates Ms. Yellen will not say at her press conference that it's a one and done operation, or that the Fed will wait until some appointed future timeframe for the second rate hike to occur. Instead, the Fed can only proclaim that the next rate hike will be based on further progress toward their inflation target.

The problem with that is if you look at the core PCE Index, inflation is currently moving away from their target.

So why would the Fed still move you ask? Because the U-3 Unemployment rate is moving dangerously close to crossing what the FOMC believes is the inflationary Philips Curve Maginot line. This is the imaginary line where Keynesians believe a low unemployment rate triggers rising inflation.

However, anyone who lived through the stagflation of the 1970's or who looks historically at the relationship between inflation and unemployment rates can proclaim with absolute certainty that the Phillips Curve is completely bogus.

That's because inflation doesn't come from more people becoming productive; inflation is a function of the market losing faith in the purchasing power of a currency through its dilution.

Therefore, as long as the Obamacare economy keeps producing part-time food service employees, the unemployment rate will continue to fall south of its current reading of 5.1%; and the Phillips-Curve-obsessed Fed will move more towards its dot plot goal in fear of employment inflation that is never coming.

The 2009 argument for a bull market was the Fed would keep printing money until the stock market and economy improved. Now the complete opposite is true, the Fed will slowly hike interest rates simply to get off the zero bound range it has been stuck at for seven years and because it is worried about a meaningless U-3 unemployment figure's effect on inflation.

Nevertheless, for the first time in history it will be hiking rates into falling inflation, negative earnings and revenue growth on S&P 500 companies, and falling global GDP growth. Therefore, I predict the Fed will only be able to move the Fed Funds Rate higher by 50-75 bps before it becomes obvious even to the hopelessly confused FOMC that global markets and economies are in serious trouble.

This is the sad truth: either the massively overvalued stock market and artificially inflated economy will continue the insipient rollover that began in the middle of August, causing the Fed to stay on hold; or the Fed will begin to slowly hike rates, causing the yield curve to quickly invert and the economy to completely fall apart. This is why wise investors should now be out of, or short, the stock market. At least until the S&P 500 trades near 1600; or the Fed transitions to an easing stance.

Michael Pento produces the weekly podcast “The Mid-week Reality Check”, is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2015 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules