This afternoon, San Francisco Fed President John Williams delivered a speech that I believe signals a rate rise at the October meeting. It seems that the chorus of criticism from all corners of the political and economic spectrum is causing the FED to reconsider its September decision to keep rates at zero bound, even with the weak September jobs data. The voices of Summers and Krugman have been drowned out by the criticisms from investors and other academics. Why do I think the rate increase is coming? Williams gave three hints in a speech he delivered today, “The Economic Outlook:Live Long and Prosper.”
Notes From Underground: The Fed Will Raise Rates at the October Meeting (Wait For The Press Conference)October 6, 2015
Before we review Friday’s action, I would like to present a quote from Tolstoy sent from a long-time reader and is representative of the 2+2=5 basis of Notes From Underground. While I have respect for the theoretical basis in the continued search for knowledge, I try to write NOTES with a deeper understanding of the fundamentals that drive markets on a short- and long-term time scale.
In the famous song of 1960s lyricist and polemic,Tom Lehrer, the song is about a relationship based on masochism, which certainly seems to be relevant to the FED and the stock markets. The song stresses how pain is pleasure:
I ache for the touch of your lips dear,but much more for the touch of your whips dear,You can raise welts like nobody elseAs we dance to the masochism tangoBash in my brain,and make me scream with painThen kick me once againAnd say we’ll never partI know too well,I’m underneath your spellSo darling if you smell something burning it’s my heart … hic … excuse me …Take your cigarette from its holderAnd burn your initials in my shoulderFracture my spineAnd swear that you’re mineAs we dance to the Masochism Tango
Notes From Underground: Yellen Announces Possible Decrease In Liquidity; Suffers Bout of DehydrationSeptember 27, 2015
In Chair Yellen’s speech on Thursday–“Inflation Dynamics and Monetary Policy”–she walked backed comments from last week’s UBER-dovish press conference. My first impression, given the wonkish nature of the speech, was that she plagiarized Stanley Fischer’s speech at Jackson Hole, or merely bought it at an online economic website. Second, the Yellen speech did hint at a possible answer to the aggressiveness of Jim Bullard’s desire for the Fed to raise rates as soon as possible. After rereading the speech, it seems that Yellen was NOW willing to raise rates and be part of the FOMC members pushing for a rate rise before the end of 2015. Why?
Today, in an act of major disfunctionality, St.Louis Fed President James Bullard called out CNBC‘s Jim Cramer about his continual call to keep rates at zero. Mr. Bullard called Cramer’s continued push for the FED to remain as easy as possible “unsavory.” The fact that Jim Bullard went into Cramer’s den to state his case is unsavory. If the Fed is so concerned about the pressure emanating from the CNBC airwaves, why would you lend them more credibility by appearing on Squawk Box? Fed Presidents and Governors are always making themselves available to the electronic media in an effort to “enlighten” the public. Can the FED really be concerned about the daily discussions about policy and the pressure it might provide to keep equity markets elevated? Please bring back Volcker and restore some dignity to the world’s central bank.
Readers of NOTES FROM UNDERGROUND are aware that one of my major themes during the past six years has been Ben Bernanke’s pledge to Milton Friedman at MILT‘s 90th birthday. I’m paraphrasing, but Bernanke vowed the Fed would not make the mistakes of 1937 and raise rates in a period when fiscal policy was tight and monetary policy needed to be loose to sustain its velocity. In 1937 the combined policies of the FED and the Henry Morgenthau Treasury tightened together, which led to a renewed recession of the U.S. economy and a severe bout of renewed DEFLATION. It is the FED‘s and other central banks main thrust: To prevent a deflationary cycle taking hold. Bernanke is the ultimate 37er. For the FED, “whatever it takes” means inflation running hot so as to prevent any possibility of the LIQUIDATIONISTS and DEFLATION gaining a foothold in the economy.
There’s Something happening here
What It is ain’t exactly clear
there’s a man with a gun over thereTelling me I got to bewareThere’s battle lines being drawnNobody’s right if everybody’s wrongYoung people speaking their mindsGetting so much resistance from behindWhat a field-day for the heatA thousand people in the streetSinging songs and carrying signsMostly say, hooray for our sideParanoia strikes deepInto your life it will creep It starts when you’re always afraidYou step out of line, the man come and take you awayIt’s time we stop ,hey what’s that soundEverybody look what’s going down
Stephen Stills wrote these words almost 50 years ago and it certainly applies to all the noise and opinion filling the media about a possible 25 basis point increase in the FED FUNDS RATE. The financial press has made tomorrow’s FOMC statement and Yellen press conference into a mania almost as great as the FACEBOOK IPO. Everybody who is anybody has an opinion about what the FED OUGHT TO DO.
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As we head into decision day on U.S. interest rates it is important to note that all the major equity indices remain under their 200-day moving averages, despite recent rallies amid short covering (and bargain hunting remains an active sport). The consensus based on the pricing of FED FUNDS futures contract has the odds in favor of a NO CHANGE in policy by the FOMC. I caution that bargain hunters have been on the prowl as the voices of Summers, Lagarde, World Bank and others have given fortitude to those needing to put cash to work. If the FOMC stays the present course the immediate impact MAY be an initial equity rally but be patient to see how the market is reacting after at least 12 hours.
This Sunday begins the Jewish Holiday of Rosh Hashanah, which brings on a very solemn 10-day period of deep introspection as God judges the entire world for the coming year. So a very happy, healthy and prosperous year for all readers of Notes From Underground. Following the Monday and Tuesday’s days of reflection we come to the financial market’s judgement day, the Fed’s decision on interest rates. Let’s be as patient in reacting as the FED has been in raising interest rates. Will the FED act to raise rates and disregard all its fears of market turmoil? The FED has a poor history of making firm decisions in the face of creating violent market reactions. The Bernanke Fed failed miserably in an attempt to end QE, cowering in the face of the “taper tantrum.”
The FED‘s upcoming FOMC meeting (September 16-17) is resembling the theatrics of the Greek debt crisis: Opinions abound about what do to and the entire world has voiced concerns about the outcomes from whatever decision Chair Yellen decides. The media is filled with articles advising the Fed to raise/don’t raise. However, we’ve come to the point, JUST DO IT. Unlike Nike, there will be no victory.