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

Have You Considered What Wil Happen If the Fed DOESN’T Raise U.S. Interest Rates?

Interest-Rates / US Interest Rates Dec 15, 2015 - 05:24 PM GMT

By: Rodney_Johnson

Interest-Rates We’ve gotten it into our heads that Fed Chair Janet Yellen is on her way down from the mountain top carrying stone tablets etched with the details of a rate hike. We don’t know exactly what form it will take, but let there be no doubt – the financial gods have spoken, so a rate hike there will be!

But it’s not that simple.

The Federal Open Market Committee (FOMC) is the group that determines monetary policy. This group must reach a consensus on policy changes before anything new can happen.


At the last meeting, the vote to keep rates the same was 9-to-1, with St. Louis Fed President Lacker dissenting.

In the vote to raise rates this week, it is possible that both Federal Reserve Board Governor Daniel Tarullo and Chicago Fed President Charles Evans will vote to keep rates where they are, making the tally 8-to-2 in favor of higher rates.

It’s still a consensus, but not unanimous. But what if the vote is closer, or even – dare we say it – what if it doesn’t carry?

At this point, barring a catastrophic event (think terrorism on a big scale) in the U.S. or Europe, or perhaps a terrible development in the Middle East, the Fed had better raise rates. If they don’t then they risk the one thing that keeps them in a job – credibility.

The Fed has many critics, including me. I don’t agree with some of their biggest policy moves, such as printing $4 trillion new dollars and holding real interest rates below zero for years.

I think their efforts have slowed the recovery in the U.S. and put a financial straitjacket on investors who deserve to be paid for putting their money at risk in fixed income.

But the Fed also has many supporters who rightly point out that our economy so far has not fallen off a cliff because of these interventions. They also note inflation has not run rampant (I’ll leave aside the $2.9 trillion in excess reserves here, as I’ve discussed that elsewhere).

Overall, the Fed still seems in control, and for the past month several members of the FOMC, including the Chair, have spent their time telling audiences that the time for higher rates has arrived.

Whether we like the decision or not, they have done everything but hold a pre-meeting vote to let us know it’s on the way. A reversal of this telegraphed position would mean that market participants have no basis for believing anything that FOMC members say. They’d only be able to look at actual policy moves, like changing rates, for clues on what lies ahead.

The result would be chaos.

Without knowing the direction of monetary policy – tightening with higher rates, or loosening with lower rates – no one knows how to manage their interest-rate sensitive positions.

Bankers don’t know if they should open the spigots today to lock in current rates, or hold off on lending because higher rates are around the corner. Corporations don’t know if it’s better to issue bonds at today’s rates or wait for tomorrow. Investors can’t determine if they should grab bonds available today or wait as well.

And that’s just for starters.

The world of currency is much bigger than the bond market, with trillions of dollars’ worth of currency trading hands every day.

Without an understanding of where interest rates are headed, currency traders, hedge funds, companies using currency for international trade settlements, and all other participants would be at a loss as to what comes next for their dollar holdings. Will they increase in value, or fall?

The resulting chaos would lead to financial self-preservation. Who would want to risk lending more money if rates might go up at the next Fed meeting?

If we can’t believe what they tell us, then this might be the case at every single meeting, which would cut down on the loans made by banks. They would hold their capital for another six weeks, waiting for a better rate environment.

Furthermore, currency traders and trade settlement financiers would likely pare their U.S. dollar holdings, since the currency would lose a bit of its stability.

Simply not raising rates at one Fed meeting wouldn’t kill the dollar by any stretch, but it would definitely put a nick in the armor. The dollar would fall against other currencies, and then be much more volatile leading up to future Fed meetings. While the cheaper dollar might help U.S. exports in the short run, the volatility would harm all dollar holders over time.

Apart from all this, I expect the Fed to raise rates this week in response to higher inflation on the horizon, and the desire to have at least one rate hike in the bag before the next downturn.

But more importantly, there is quite a case to be made that at this point, after everything they’ve said, the Fed must raise rates. They’ve got a reputation to protect.

All the commotion aside, we have a number of trading services that respond to short-term fluctuations in the market. But Lance’s Treasury Profits Accelerator most directly correlates with movements in interest rates. If you’re wondering how to position your portfolio for this event, you may want to take a look.

Rodney

Follow me on Twitter ;@RJHSDent

By Rodney Johnson, Senior Editor of Economy & Markets

http://economyandmarkets.com

Copyright © 2015 Rodney Johnson - 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.

Rodney Johnson 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