12 June is just three weeks away.
Thats when the Federal Open Market Committee (FOMC), the Feds
interest rate policy arm, will in all likelihood raise interest
rates another 0.25%, the seventh such rate increase since the
lift-off in interest rates in December 2015.
The market is currently putting the odds of a rate hike at
This is the most aggressive tempo of rate hikes of any major
central bank and puts US policy rates significantly higher than
those in the UK, Japan or Eurozone.
The issue for investors is whether the Fed is raising rates too
aggressively considering the strength of the US economy. Higher
rates imply a stronger dollar, imported deflation and headwinds to
If the US economy is on a firm footing, the rate hikes may be
appropriate and even necessary to head off inflation.
But if the US economy is vulnerable, the Feds actions could
trigger a recession and stock market selloff unless the Fed
reverses course quickly.
My view is that the latter is more likely.
The Fed is tightening into weakness and will reverse course by
pausing rate hikes later this year.
When that happens, important trends in stocks, bonds, currencies
and gold will be thrown into reverse.
Outwardly, the Fed is sanguine about the prospects for monetary
normalisation. Both Janet Yellen and new Fed chair Jay Powell have
said that interest rate hikes will be steady and gradual.
In practice, this means four rate hikes per year, 0.25% each,
every March, June, September and December, with occasional pauses
prompted by strong signs of disinflation, disorderly markets or
dwindling job creation.
Lately, job creation has been strong. And inflation has picked
up. But its been spotty. The Fed still faces headwinds in achieving
its inflation goal.
The Fed is targeting a 2% annual inflation rate as measured by
an index called PCE core year over year, reported monthly (with a
one-month lag) by the Commerce Department.
That inflation index has not cooperated with the Feds wishes
and, despite recent gains, hasnt been able to hold consistently
This has been a persistent trend and should be troubling to the
Fed as it contemplates its next policy move at the FOMC meeting on
Ive warned repeatedly that the Fed is tightening into weakness.
The Atlanta Fed is projecting a 4.1% growth rate for the second
quarter. But its known for its rosy projections that are almost
always revised downwards once the data come in.
It had to lower its estimate of first quarter growth from over
5% to 1.8%. You can pretty much bet theyll have to significantly
reduce this p...