Could A Spineless Fed Allow NIRP To Happen?

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Includes: DIA, IWM, QQQ, SPY
by: Orange Peel Investments

Summary

Market is anxiously awaiting Fed minutes today.

Fed needs to remain hawkish and confirm second rate hike if they want to keep what little credibility they have left.

With inflation now heading toward Fed target, there are many options Fed has before needing to go NIRP.

By Parke Shall

Today is certainly going to be a big day for the markets. Today we will get the latest round of thinking from the Federal Reserve as to whether or not they want to continue with rate hikes this year.

The Fed had anticipated four rate hikes this year, but as markets have looked a little bit shaky, the Fed has become even more spineless, and is deathly afraid to raise rates unless everything is perfect and markets are ripping the all-time high.

We think that this thinking on the part of the Fed is ridiculous. It is almost as if the Fed and investors forget that a raising rate hike environment is indicative of a healthy market and a healthy economy. The Federal Reserve is supposed to be a clinical and objective entity that manages policy based on the large bubbles and bursts that occur in the capital markets. The Fed is supposed to help ease the volatility on major swings and then it is supposed to sit back and allow the markets to do what they do best, price equities according to business performance and the overall economy.

Instead, we have been dealing with a scared Federal Reserve that trembles at the sight of even just a 5% correction in the markets, despite this being a healthy occurrence that needs to happen in all healthy capital market systems. The Fed seems to be managing the market like a day trader, on a day to day basis, subjective to the needs of the here and now only without any vision for what their actions may do over the course of the long term.

With the feeling being passed around that the Fed does not seem to have any control, and that it isn't even sure what it wants to do itself, people have been raising a point about negative interest rates.

Negative interest rates have been in the news cycle since countries like Japan have adopted these policies in order to try and stimulate incredibly low growth, low inflation economies.

We think negative interest rates, or even going back to 0% interest rates here, would be catastrophic move for the Federal Reserve who would lose the one shred of credibility that they have left. These just simply become talking points in the media due to their prevalence elsewhere in the world, and while Fed chair Janet Yellen has not said that she wants to go the way of negative interest rates, she has made statements that conclude with "everything is on the table".

We think that the Fed is relatively spineless and that they lack confidence in their decisions, which makes them a liability to the market rather than an asset. But even we do not think that our Federal Reserve would consider negative interest rates now, for several reasons.

First, as we saw yesterday, inflation is starting to pick up here in the US. The Fed has a 2% target for inflation this year and the closer we get to that target, the less likely we believe the Fed is going to implement stimulus.

Second, the Fed actually has numerous options if they wanted to go down the road of stimulating the economy once again. Negative interest-rate policy is not the next step that the Fed would need to take. First, if it could simply tell the markets that it is not implementing another rate hike, that, in and of itself would do well to stimulate the markets.

If they absolutely needed to, if it could also pull back rates to 0% again. If it also can lower the rates on bank reserves. These two steps would encourage further extension of credit and would turn the faucet of credit back on full blast, allowing the market access to cheap capital. Not a recommended action, if you ask us, but definitely a compromise between where we are now and full on NIRP.

Finally, the Fed has the option of buying bonds from the government as it did just recently. The Federal Reserve can implement a bond buying spree; an action that was taken by countries like Japan before they went to negative interest rates.

All in all, the Federal Reserve is ripe with options to try and stimulate the markets from here, without using negative interest rates. Any of the above scenarios, to us, would be appalling. Seeing anything but a hawkish tone out of the Fed in today's minutes will be embarrassing.

If investors and The Federal Reserve would just remember that a raising rate environment indicates a healthy market, we would understand that rate hikes can lead to different types of prosperity than an environment where debt is so cheap that we wind up creating enormous bubbles and we get companies like Valeant (NYSE:VRX) imploding and losing 90% of their equity value because of the debt they were easily able to take on.

The Federal Reserve will not implement negative interest rates. We believe they should be clinical and how they approach the markets and solidify that another rate hike will definitely happen this year. The market is near all-time highs, the United States economy looks relatively strong, and the debt cycle is about to turn over. It is time to take decisive action with confidence, Fed. Show the market you can stick to your convictions and that you're not managing our capital markets like an hour by hour day trader.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.