By Parke Shall
By now, everybody knows that the Federal Reserve refused to raise interest rates for the sixth consecutive meeting. The FOMC, which laughably once talked about four rate hikes this year, has completely lost its way and given up on any type of clinical application of monetary policy.
We had one or two alarming trading days over the last two weeks that many traders think were the sole cause of the Fed delaying the rate hike. There was strong language from several members of the Fed coming into the month and all of that seemed to change when we had one day two weeks ago where the indices were down over 1%. While we can't prove it, it certainly feels like to us that the Federal Reserve is basing long-term monetary policy that is supposed to be applied clinically on single trading sessions.
It's not just us. Other traders that we speak to and editorials that we read are starting to suggest the same thing. Donald Trump, with whom we could not have less in common, has also come out and publicly shamed the Federal Reserve for the lack of action. While we are not sure that Mr. Trump understands what it is he is arguing against, he happens to be right. The public doesn't seem to understand that with lower interest-rate's come bigger bubbles.
Now traders are speculating that the chance of a rate hike in November is almost nothing. Analysts and traders alike have suggested that there is little to no chance that the Federal Reserve will hike rakes in November due to the election.
That leaves us only with December, if Fed chair Yellen's words are to be trusted from this past week. The Fed has said it sees one rate hike for the remainder of this year, and we know that November is off the table, so it is now looking like December is the only option.
This is a problem because the Fed is essentially leaving itself no outs for 2016 at this point. If we get real economic turmoil prior to December, the Fed will likely push rate hikes back again to 2017 and 2016 will be considered a year where absolutely nothing got done on their end.
We have stated in several articles our cause for concern with the Federal Reserve delaying these hikes that should have been undertaken a while ago. Equity markets are still at or near all-time highs and they have nearly doubled over the last few years. Meanwhile, the Federal Funds Rate has come up a mere 25 basis points. The inaction from the Fed as they seek to meet their inflation target and wait for an already much improved jobs picture to get even better is going to lead us down the road where we could have a real catastrophe, we believe.
Similar to the way the Fed has not left itself any outs for 2016, the Fed refuses to think about what happens if confidence in the central banks starts to shake. Keeping interest rates low is a good idea as long as the public buys into the notion that the Federal Reserve will hike when it is supposed to and that rates will eventually come back higher.
When confidence in the ability to do the right thing is shaken, the Fed will have a much tougher time keeping the markets satisfied and we fear they may never get to a point where they feel like it is time to raise rates. Further, if there is to be real capitulation and real selling, don't we want that to be in an environment were interest rates are already higher? This way, at least the Federal Reserve has the option to once again lower rates. If we get that type of confidence failure and capitulation in an environment where rates are near zero, the Federal Reserve is essentially out of options when it comes to interest rates.
We've been critical on this in the past and we've written several articles criticizing the Fed for their inaction. We continue to think about the scenario that will unfold when confidence is lost in central banks. What will happen when nobody is buying the Fed's line anymore and people just want to exit the market regardless of what type of monetary stimulus they promise? This is the kind of situation the Federal Reserve is setting it's self up for now. While we hope they raise rates in December, nothing would surprise us at this point and we hope for their sake and for the market's sake that the Federal Reserve takes a clinical clearheaded approach and raises rates at least once this year, and then several times next year. Otherwise, in the long term, they are doing the market a large disservice.
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.