Conditions for a rate increase by the Federal Reserve are “on the verge of broadly being met,” Eric Rosengren, president of the Federal Reserve Bank of Boston, told the Financial Times … According to an article on Sunday, Rosengren told the FT he was getting ready to back tighter monetary policy as economic and financial indicators had become more positive. -Reuters
The more you find out about how central banks operate, the stranger the system seems.
Gold has moved down of late while stocks have been mixed. But the last time the Fed raised rates in December, stocks nearly collapsed.
Are we supposed to believe this time round there will be a different outcome? According to some at the Fed, the answer is yes.
Eric Rosengren explains that “economic and financial indicators [have] become more positive in the US.
How does he know? We’ve examined these sorts of indicators and they seem exaggerated, tending to show progress where there is none.
Here’s an elaboration from John Crudele in The New York Post (late 2014):
The economy isn’t really doing what the statistics say it is doing. Our nation’s economic statistics are nipped and tucked, massaged, managed, fabricated and dolled up. In short, our statistics are wrong and Main Street folks know it. Here’s what a Wall Street hedge fund mogul, Paul Singer, head of Elliott Management Corp., told his clients the other day:
“Nobody can predict how long governments can get away with fake growth, fake money, fake jobs, fake financial stability, fake inflation numbers and fake income growth,” Singer wrote. “When confidence is lost, that loss can be severe, sudden and simultaneous across a number of markets and sectors.”
Is Rosengren aware of these manipulations? It doesn’t seem to matter. For some reason, he’s sure the economy is headed in the right direction:
“I want to be sensitive to how the data comes in, but I would say that most of the conditions that were laid out in the minutes, as of right now, seem to be … on the verge of broadly being met,” said Rosengren, a voter this year on the Fed’s policy-making Federal Open Market Committee.
Minutes of the Fed’s April meeting released last week showed Fed officials believed the U.S. economy could be ready for another interest rate increase in June.
Not even Bloomberg believes this time. In an article entitled Behind the Fed’s Faulty Logic on Interest Rates, Ramesh Ponnuru argues that, “The Fed shares the widespread view that the prolonged period of low interest rates we have been experiencing is abnormal and needs to change.”
And then there is this:
Central bankers may also want more room to maneuver in the event of a recession: It won’t be able to reduce interest rates very far if they are already low, so why not raise them when the economy is doing well?
The article points out that the Fed doesn’t seem very flexible when it comes to inflation targeting. Its two percent inflation target seems like a “ceiling” according to Ponnuru.
This means that the Fed will take proactive steps when it comes to damping price inflation, and these could damp economic activity as well.
We’ve argued that like other central banks the Fed cannot be aggressive about interest rates because the US economy is in what might be characterized as a depression. What else do you call it when 90 million Americans are not seeking formal work within the system?
It could be that Yellen and company understand that further economic blows are on the way. These will call for further rate cuts. And they are racing to raise rates beforehand.
This assumes that the Fed is not willing to pursue negative interest rates, and that is probably a good assumption. Negative rates would greatly complicate the Fed’s position as regards the American public and the alternative ‘Net media.
Ponnuru comes close to arguing this as well. He writes, “… Higher interest rates are an end in themselves. That dubious assumption seems like the only way to make sense of the Fed’s current plan.”
Will the Fed actually follow through? Sometimes, the speculation alone accomplishes the purposes that Fed has in mind. For instance, the gold price against the dollar immediately suffered from rate-hike speculation.
At some point – as this past December – the Fed will have to act or lose credibility.
Conclusion: Another hike will likely have a negative equity impact, just as in December. Will gold then continue to move down … or will it be the “last asset-class standing.” We would suggest the latter rather than the former. Right now, the markets seem to have it backwards.