Today was “Fed Day” — and, as usual, there were quite a few fireworks.
No, the Federal Reserve didn’t actually raise short-term interest rates yet. But it did suggest it’s still on track to do so down the road.
At the same time, policymakers signaled they remain worried about weak energy and non-energy prices. Those developments were driven in part by overseas turmoil and the epic dollar rally of late 2014.
Specifically, the post-meeting statement said inflation “continued to run below the Committee’s longer-run objective.” Then at her post-meeting press conference, Chairman Janet Yellen highlighted the fact inflation is projected to be “quite low” this year.
Yellen also noted that net exports remain a “substantial drag on growth.” That’s another big finger-point at the dollar rally, because the rising greenback has made our products more expensive vis-à-vis those produced by foreign counterparts.
While Yellen did say the labor market is showing “further progress” overall, she also noted that the pace of growth has slowed a bit recently and that wage growth remains “relatively subdued.” And she warned that the Fed is very worried about making waves with policy, saying the Fed wants to “avoid any type of needless misunderstanding of our policy that could create volatility in our market and potential spillover into emerging markets.”
|“The meeting comes amid a backdrop of increasing turmoil and confusion.”|
In response to the Fed’s decision and Yellen’s comments, the U.S. dollar weakened sharply across the board. Gold and silver prices jumped, while beaten-down emerging market shares reversed course and surged after suffering big losses earlier in the day.
In the interest-rate market, the yield curve steepened. Shorter-term yields fell, while longer-term yields rise. That’s what you typically see when the bond market is growing more worried about longer-term inflation risk.
So why did the Fed take the approach that it did? I believe it’s because the meeting comes amid a backdrop of increasing turmoil and confusion. Greece is hurtling toward the financial abyss, with even that country’s central bank warning of an “uncontrollable crisis” that poses “great risks for the banking system and financial stability.”
As Yellen noted, wage growth also remains lackluster. GDP actually shrank in the first quarter of this year, and the surging dollar has clearly helped kneecap key sectors like energy and manufacturing.
|Fed chief Janet Yellen: Inflation is projected to be “quite low” this year.|
Me? I’ve been as crystal clear as I can here in Money and Markets and elsewhere. The Fed should have raised interest rates at least once already to get policy back to some semblance of normalcy … and paired that with more “open mouth” operations to beat the dollar back.
It’s clearly starting to head in that direction, by talking about future rate hikes but also signaling discomfort with the dollar’s exchange rate value. But it looks like bond investors are no longer waiting around for Yellen to catch on.
Indeed, they’ve been selling like mad despite the fact the Fed hasn’t officially hiked yet. That is driving bond prices sharply lower in “Bloody Wednesday” fashion, while recently pushing the yield on the 30-year bond to a nine-month high.
Given what the Fed is doing and saying, I continue to recommended you stay the heck away from longer-term government debt, bond ETFs, and bond mutual funds.
Instead, keep maturities short and/or hold cash to avoid losses. I also suggest you shift a reasonable, measured amount of money into sectors and stocks that have already been crushed. Unlike many high-flyers, they’re the ones that have some built-in resistance to further declines driven by interest rate volatility.
Bottom line: Today’s Fed meeting makes it even more clear that the era of never-ending free money will be coming to an end before long, but that the path to higher rates will be winding. That will have wide-reaching repercussions over time, including higher volatility along the way no matter how much Yellen tries to tamp it down.
So what do you think about today’s Fed meeting? What do the Fed’s latest moves and comments mean for stocks, bonds, and currencies? Are you making any shifts in your holdings these days, in light of the evolving monetary policy backdrop? Let me know when you get a chance to comment at the website.
With the clock ticking down to zero on the Greek debt negotiations, I laid out my game plan yesterday for dealing with what might come next. Several of you responded with your own thoughts, so let’s recap them for everyone’s benefit.
Reader Vern thinks things are definitely coming to a head – and that there’s an important lesson about our future here, too. His comments:
“The Greek Prime Minister sounded like he isn’t going to give in. If the European Union is really serious about not giving in, which they should be to avoid other PIIGS doing the same as Greece, Greece will default since they don’t have the money to pay the payments that are due.
“If Greece defaults, their pensions and other giveaways will have to end. Several cities and states, and the whole U.S., are following the same recipe as Greece has been cooking with.”
On the other hand, Reader Ted K. said he’s more optimistic about a last-minute save. His view: “I believe we will have a Greece deal. If Greece defaults, Russia will advance its position with Greece due to its geopolitical position. This will have a negative impact to the U.S. and the whole of Europe in general. The solution in Greece is political not economic as it appears.”
Speaking of Russia, Reader Ken said that may be where Greece is forced to turn for help. His take:
“There is another possibility for Greece that you have not considered. Russia could come to the aid of Greece and help stabilize them, while they get concessions to establish military bases and use of ports in the Mediterranean to build naval ports for the Russian navy.
“This would give the Russians another foothold to expand their control over Eastern Europe without having to go to war. Italy, Spain and Portugal could easily be the next stepping stones for expanding their power. Also they would pick up a lot of trading partners along the way. The Cold War in not over!”
Finally, Reader Billy laid out a much more pessimistic scenario – one in which Greece is the first of many dominoes to fall. Here’s a recap:
“Based on macroeconomics, technicals, cyclicals, geopolitics, and demographics, I would have to lean to scenario #3, wherein Greece is simply the tip of the iceberg given the trillions and trillions and trillions of dollars of fiat-based debt that exists around the world on a private, or, in this case, sovereign basis.
“With deflation gaining the upper hand despite all the money printing, QE, and associated rhetoric — as seen by the commodities complex deflating over the last year or so — the Greek crisis could just be the spark that sets off a major bond crisis and ensuing equity crisis. In fact, if you look at the capital markets from a technical standpoint, it looks like the Dow and S&P are putting in major tops as we speak.”
In other words, a ton of outcomes are possible here. I’ve recommended some pre-emptive steps for my subscribers to take, and I’ll have more depending on how the situation evolves.
Meanwhile, keep those comments coming over at the website. This link will let you sound off on the latest Greek developments.
The wave of mergers in the health-care insurance industry shows no sign of ebbing. UnitedHealth Group (UNH), Aetna (AET), Cigna (CI), Humana (HUM), and Anthem (ANTM) have all been discussed as potential buyers or sellers.
The consolidation stems from a need to cut costs amid margin pressure brought about by Obamacare and a stagnant corporate health care environment. Some experts worry that the emergence of even-larger insurers would result in even-higher health care costs for consumers – the last thing Americans need right now.
We’re in a bit of an earnings lull right now, but FedEx (FDX) did come out and report adjusted fourth-quarter profit of $753 million, or $2.66 a share. That missed estimates by three cents. Revenue also came in short at $12.1 billion, hurt by problems related to fuel surcharges and currency moves.
Tropical Storm Bill made landfall in Southeast Texas as expected yesterday, with heavy rainfall rather than strong winds as the main threat. Minor coastal and inland flooding were reported in multiple locations, including those already hit by heavy deluges a few weeks ago.
Forget the “Cheatriots.” Maybe we should be talking about the “Cheat-dinals.” The FBI is investigating the St. Louis Cardinals for allegedly hacking into the computer systems of the Houston Astros, in order to steal player records, scouting reports, and other materials. No word yet on what penalties might befall the team or the front office personnel who reportedly led the hacking efforts.
So what do you think about all these health care mergers? The corporate earnings backdrop? Or yet another major sports scandal? Hit up the website and weigh in when you have a minute.
Until next time,