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Fed Cavalry Charges To Market’s Rescue Ep. 194

  • Today was a day of damage control for the Federal Reserve
  • It almost seems like whenever they discuss the possibility of a rate hike, they’re really launching a trial balloon
  • They want to gauge the possibility of a rate hike and then if the market kind of shrugs it off, or blesses the rate hike the way it did last year nearing December, if the market seems it’s OK with a rate hike, then maybe they’d consider actually implementing one
  • But before they do it, they want to test the waters, they want to see how the market reacts to that possibility
  • Clearly, the near 400-point decline in the Dow on Friday showed that the market really wasn’t very friendly to the possibility of a rate hike
  • Let alone the certainty of one
  • Just the mere possibility, however remote, really spooked the market
  • Today the Federal Reserve had a chance to dial it back
  • They had 3 Fed presidents speaking today, and not one of them talked about the possibility of a rate hike
  • Starting with an 8am talk this morning by Atlanta Fed President and CEO Dennis Lockhart
  • Now Dennis was specifically asked about a rate hike, and whether he thought the Fed would move in September or December
  • He specifically refused to comment
  • He said, “Financial markets seem to be very sensitive to the remarks of Fed speakers at the moment”
  • And so in light of market sensitivity, he refused to answer the question
  • Why not answer it? Don’t you want to prepare the markets for a possible rate hike?
  • Well they don’t want to say what they want to do, because they don’t like the way the market is reacting
  • You’d better believe that if the markets reacted favorably to a rate hike, they would have stayed on script
  • Because of the the sell-off on Friday, and where futures opened before Lockhart’s speech, the Dow was set to open up down 100 points or more
  • But once he spoke, all of a sudden, people were thinking, “Hey wait a minute, he didn’t say anything about a possibility of a rate hike and he’s worried about the markets’ sensitivity
  • The only thing he said that could have been interpreted as a rate hike comment was when he mentioned the data over the past few weeks “warrants serious discussion of a policy rate increase”
  • The data over the past few weeks has all been bad
  • All he said is, it warrants discussion of a policy rate increase, but he didn’t say that we should be in favor of an increase, or against an increase
  • He just said the data over the past few weeks warrants discussion
  • To me, what that means is, we should discuss not raising rates because all the data we’ve gotten recently is weak
  • It was the data we got a couple of months ago that supposedly let Janet Yellen conclude that the case for rate hike had strengthened
  • But really, what Lockhart is saying is, “We need to have a serious discussion about a rate increase.”
  • Not that we have to discuss raising interest rates, but maybe we should discuss not raising interest rates because based on the data from just the past few weeks, one would argue against an increase
  • If he had said, “We need to discuss an increase”, he wouldn’t have predicated it with, “the data over the last few weeks”
  • That data, in and of itself, is not friendly to an increase
  • If he was in favor of a rate increase, he would not qualify it the data over the past few weeks
  • Also, just suggesting a discussion about a policy rate increase is not the same as actually increasing the interest rate
  • A discussion to increase rates could lead to no rate hike
  • Well, I assume they’ve been having discussions about raising rates for the last several years
  • What else do they discuss over there?
  • But people heard the words discussion and rate hike in the same sentence and the markets weren’t that excited until we got another Fed comment at about 1:00pm
  • The markets had gone positive
  • They liked the fact that at least Lockhart was worried about the markets and decided not to comment on whether or not there would be a rate hike
  • I still do not think they were planning a September rate hike
  • They just want to keep the idea alive
  • The Fed governors do discuss the idea that they do not want to create an asset bubble
  • If they were truly concerned about asset bubbles they would never have launched QE1
  • The irony is, they launched Quantitative Easing specifically to get asset prices to go up
  • The goal was to inflate a bubble
  • And now they’re saying they want to avoid one, well they’ve already got one
  • But I’m thinking that maybe what the Federal Reserve wants to do is they don’t want to raise interest rates
  • They know they have to keep them low indefinitely
  • They know they’re going to do more QE
  • But they don’t want to say that, because if they actually tell the markets:
  • “Hey, this is QE infinity; we’re never raising rates, they know the markets will take off
  • They may not want that bubble
  • So their strategy to keep the markets in check, is to keep talking about the possibility of a rate hike
  • So the markets never really get the message that they have nothing to worry about
  • This is the forward guidance: Getting the markets to believe that a rate hike is around the corner and that will put a damper on the animal spirits of the traders
  • When they knew that the Fed was not going to raise rates for a long time, it was going to be easy money, the markets were going up
  • The only thing that stopped the markets from going up this past year or two is the idea that the party’s ending
  • We don’t know exactly when, but we started with the taper talk
  • Then the actual taper
  • Then we had one rate hike
  • The Fed does not want to actually shrink its balance sheet because it will collapse this phony economy
  • But it doesn’t want the markets to know that, because it doesn’t want the bubble to get bigger
  • What does it do?
  • It keeps interest rates low to prop up the phony economy but maintains a rate hike narrative so the bubble does not get out of control
  • But the minute they start talking about raising rates, the market starts to go down and that’s something they are really afraid of