The latest batch of FOMC minutes released earlier this week highlighted some of the ongoing deflation themes we have been exploring in previous posts, and offered some confirmation of our forecast for rates to remain flat for the foreseeable future. Despite the strong conviction amongst sell side analysts a few months ago that rate increases were just around the corner, it seems increasingly likely that such a move will be delayed. Certain members of the FOMC Committee pinpointed the spectre of deflationary forces from overseas as being a potentially disruptive force for market stability in the months ahead. This in part, contributed to a fairly split opinion amongst committee members when it came to the potential for any interest rate increases in the near term.
Some of the major sticking points included concern about the rapid strengthening of the dollar which has been occurring over the past year. The minutes noted that “ A number of participants cited the further appreciation of the dollar and recent weakness in spending and production data as reasons for their revision.”
Various problems overseas were also cause for concern. “Participants pointed to a number of risks to the international economic outlook, including the slowdown in growth in China, fiscal and financial problems in Greece, and geopolitical tensions.”
“Several participants judged that the economic data and outlook were likely to warrant beginning normalization at the June meeting. However, others anticipated that the effects of energy price declines and the dollar’s appreciation would continue to weigh on inflation in the near term, suggesting that conditions likely would not be appropriate to begin raising rates until later in the year, and a couple of participants suggested that the economic outlook likely would not call for liftoff until 2016.” – March FOMC Minutes
The timing of this “Liftoff”, or “Meltdown”, as it will be known throughout much of the world outside of the United States, appears to be balanced quite evenly amongst policymakers. There is something for everyone in the March statement. The financial community in some quarters will likely draw a huge sigh of relief from the cautionary sentiment, but it’s becoming increasingly clear that either way, whether the Fed raises rates in June, later this year, or never, that something is seriously dysfunctional with our financial markets in their present state.
Monetary Policy trumps fundamentals
The Fed faces an increasingly unenviable task. The interconnected nature of the world’s financial markets make for an increasingly binary, and fraught world when it comes to monetary policy. The Fed, as we have said for sometime, is increasingly global – US monetary policy is the tune the whole world dances to. Emerging Markets find themselves at particular risk to rising rates, but they are just one example of reality and fundamentals being overlooked due to the intoxicating effects of cheap money. The Fed has to digest all of the implications a rise in rates would bestow upon the world – with risk premiums across most asset classes completely out of line with historical norms it seems highly unlikely that overbought financial assets could sustain any repricing of this premium. As a consequence, price distortions are likely to continue throughout the financial landscape – and it seems increasingly clear that there is no pain free decision for the Fed going forward. The Fed has to keep abreast of an ever increasing set of variables – each one increasing in complexity as the layer upon layer of malinvestment with each passing quarter.
Mission Control: GO or NO-GO for Launch
The Fed is starting to bear some resemblance to the NASA mission control centers of yesteryear. In these smoke filled, bustling rooms of engineers and computer scientists monitored a whole wrath of instruments, and flight variables, giving “no” or “no go” signals prior to a potential rocket launch.
The NASA missions of the 1960s were a triumph and inspirational celebration of the technological innovation and engineering capabilities of mankind, an affirmation of human ability and of the role man plays within the Universe – it was heady stuff. The Fed’s upcoming “Liftoff” decision, or lack there of, will be a mute celebration of financial engineering, and of capital triumphing over labor and entrepreneurship in an attempt to salvage the wreckage imposed by reckless investment banks. Quite a damning reflection of just how far we have fallen.
In 1961, President John F. Kennedy announced his ambition for an American to land safely on the moon by the end of the decade. Neil Armstrong descended from the lunar module 8 years later to take the most famous footstep of all time. NASA landed a man on the moon in less time than it has taken for the financial markets to rediscover a sound footing since the economic carnage unleashed in 2008. Such is the sobering scale of the problem facing the Federal Reserve and the world at large.
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