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.”
1. “In addition, an earlier start to raising rates would allow us to ENGINEER a smoother, more gradual process of policy normalization. That would give us space to fine-tune our responses to react to economic conditions. In contrast, raising rates too late would force us into the position of a steeper and more abrupt path of rate hikes, which doesn’t leave much room for maneuver. Not to mention, it could roil financial markets and slow the economy in unintended ways.”
2. “I am starting to see signs of imbalances emerge in the form of high asset prices, especially in real estate, and that trips the alert system”; and
3. When unemployment was at its 10 percent peak during the height of the Great Recession, and as it struggled to come down during the recovery, we needed rapid declines to get the economy back on track. NOW THAT WE’RE GETTING CLOSER, THE PACE MUST START SLOWING TO MORE NORMAL LEVELS. LOOKING TO THE FUTURE, WE’RE GOING TO NEED AT MOST 100,000 NEW JOBS EACH MONTH.” [emphasis all mine]
The FED seems to be signalling through Yellen’s protegé that it will raise and the 142,000 non-farm payroll is strong enough to allow for that decision. President Williams may not be Jon Hilsenrath, but he certainly has Chair Yellen’s ear. NOW MY VIEW IS MERE OPINION AND I WILL WAIT FOR THE MARKET ACTION TO CONFIRM, but in spite of Larry Summers proclaiming that a need to raise rates is not about FED credibility, it seems to be exactly an issue of CREDIBILITY.
The rally in the GOLD and SILVER markets, and the softness in the U.S. DOLLAR appear to be all about the market’s opinion of Fed policy. Even the yield curves are making a statement about being concerned about the inconsistency in FEDSPEAK. But with GOLD holding in the face of the EQUITY rally and the DOLLAR soft even in the face of a risk on atmosphere, correlations are breaking down and the Fed’s understanding of market action is again being challenged. I say October because I believe December is too late as year-end funding issues will cause unwanted volatility in the REPO MARKET.
Barring some unseen geo-political event, I believe the October FOMC meeting is definitely in play. Let’s see if the markets absorb the Williams speech in similar fashion. A flattening in the curves over the next two days will be a corroborating element. The initial reaction should see the recent rally in GOLD correct and the DOLLAR get a bid if others view the Williams speech similarly. Then the real test of Fed credibility will begin.
***Tonight the Bank Of Japan will announce its interest rate decision. Goldman and several other investment banks believe that Governor Kuroda will pursue a further increase in QQE before October ends. In my OPINION this has no context for the Japanese government will be reticent to do anything that signals a renewed policy to weaken the YEN. The Chinese will put downward pressure on the YUAN if the Japanese aggressively renew YEN weakness and also with the TPP (Trans Pacific Partnership) coming before the U.S.
Congress it is doubtful that Prime Minister ABE will want to rile U.S. opposition to prevent the passage of a policy he fervently fought in favor of bringing to fruition. Therefore, the Japanese have solid reasons to hold off with any further QQE and maybe act to find some new fiscal policy measures. We will learn more tonight.
I have offered up two opinions tonight that will require watching. As usual, pick your indicators as to what may signal a near term change in market sentiment about the FED. Will Yellen announce a press conference for the October meeting? That would be the ultimate signal.
Tags: BOJ, Equities, Fed, FOMC, Gold, Janet Yellen, John Williams, Kuroda, QQE, silver, U.S. Dollar
October 7, 2015 at 2:16 am |
A .25 increase in FF which would be followed over time by additional increases of that amount would have some real significance. However a one or at most a two time increase announced only to give some credibility to an increasingly discredited Fed has no real importance. All the semantic writhing by the talking heads speculating on the timing of the increase is amusing but it gives the financial networks something to dwell on. Yellin will do everything in her power to maintain the markets’ equilibrium. That includes IMO interventions which are becoming more and more apparent. Friday’s post employment number swing from down 259 to up 200 again saw the arrival of the deus ex machine (or if you are inclined more to Westerns than Greek tragedies than call it the cavalry). The mandates of employment and currency stability has taken a back seat to the well being of the SPOOS (and DAX, CAC and Nikkei).
We like Alice are falling through the Rabbit Hole into the fantasy wonderland that has been created by our Central Bankers. It was a nice business once upon a time. Quelle dommage.
October 7, 2015 at 1:13 pm |
Could not agree more.
October 7, 2015 at 2:59 am |
asherz-a beautiful post.The stock markets have proven that cheap money is still the dominant piece of the asset value puzzle—now let’s go see what the third quarter earnings bring
October 7, 2015 at 8:59 am |
Yra, Thanks for pointing this speech out! And great market analysis that is proving valuable this am. With the benefit of hindsight, this might prove to be an interesting turning point, but as you say, we have to see if others follow.
One noteworthy point: Williams says people make decisions based on “excessive optimism” causing imbalances that can be harmful. That’s the first time I’ve seen the “virtuous circle” Bernanke cited in his 11/4/2010 Washington Post manifesto as a negative. Economists usually think ‘economic agents’ only spin into deflation forever and ever and ever. Can this be another plank in the Fed decision to issue a Mission Accomplished on the wealth effect? Will our labor economist Fed head see what some are saying about inequality (link below) and finally go beyond lecturing labor on grit?
http://blogs.lse.ac.uk/usappblog/2015/07/13/rising-inequality-is-holding-back-the-u-s-economy/
October 7, 2015 at 9:18 am |
Dan–well said and amazing that the cnbc crew failed to even mention the Williams speech–wow talk about irrelevant–cnbc or fed its a race to the bottom
October 7, 2015 at 12:31 pm |
Yra, excellent post.
FED meeting is 3 weeks away. They could change their minds 5 times by then.
If Williams gets stopped out of his E-Minis…….no tightening.
October 7, 2015 at 1:11 pm |
“The Economic Outlook:Live Long and Prosper.” Who was Williams addressing? Not the 99% or even Main Street Rotary members, that’s for sure. I think the Fed is positioning for the 2016 elections throwing down the gauntlet to politicians signaling to them that it’s their turn, there will be higher borrowing costs for Treasury, establish your spending priorities, and deal with it….At least until the next financial bailout is needed via FF and QE
Last time Fed hiked from 1% to 5.25% Gold rallied.
As for market reactions, does anyone think that the more solid companies paying regular dividends and cash pay outs will tank because retail and pension funds will rush into 3% money markets that have no inflation hedge? Just what rate represents “normalization? (like FDR setting the morning fix for US Gold?) Just throwing that out there.
October 8, 2015 at 7:13 am |
Yra- When looking at 3rd qtr earnings, pay special attention to top line growth. EPS is being masked by stock buybacks fueled by earnings and debt. Also scan gross profit margins before adjustments that creative accountants like to employ.
October 8, 2015 at 5:15 pm |
These markets are making it next to impossible to make a buck. Although it’s great to catch a winning trade and have a winning protective stop in place but those moments are becoming rarer and rarer.
June 18, 2016 at 12:24 am |
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