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Rock. Federal Reserve. Hard place.
If you’re the kind of person who likes word puzzles, then there’s one for you. It perfectly illustrates the situation the U.S. central bank found itself facing ahead of this week’s policy meeting.
On the one hand, domestic job and economic growth merits at least one — and likely several — short-term interest rate hikes. In fact, I’ve argued the Fed should have started raising rates as early as January rather than waiting as long as it has.
|The Fed found itself in a tough spot going into today’s policy meeting.|
Just look at what I wrote about the most recent jobs report. The unemployment rate sank to its lowest since May 2008, while the economy created another 295,000 jobs in February. That extended one of the strongest job growth streaks in a decade and a half. But …
On the other hand, the rest of the world is still in money-printing/rate-cutting mode. I’m not just talking about the European Central Bank, but more than 20 central banks around the world.
Result: The Fed has clearly been hitting on the growth side of its mandate. But it has also clearly been missing on the inflation side of its mandate.
|“I’ve argued the Fed should have started raising rates as early as January rather than waiting as long as it has.”|
Against that backdrop, today, the Fed released one of the longest, most detailed post-meeting statements I’ve seen in some time. The gist of it?
Economic growth is still decent, the job market is in good shape, but housing remains a drag. The Fed also dropped its pledge to be “patient” about raising interest rates, a move that opens the door to a rate hike in the not-too-distant future.
But the MOST important thing, from my perspective, is something I recently said to expect: The Fed took multiple veiled shots at the dollar and the side effects of its recent rocket ride! Specifically, the statement noted that “export growth has weakened” … that “inflation has declined further below the Committee’s longer-run objective” … and that the “Committee continues to monitor inflation developments closely.”
Then in her press conference, Chairman Janet Yellen commented further in response to reporter questions on the dollar. She said “we are taking into account international developments” in currencies, and cited the “depressing influence” of the dollar’s rise on inflation, as well as exports.
Could this be the Fed’s attempt to deal with BOTH realities? To prepare the market for normalized rates (because of improved economic and job growth) … but simultaneously talk the dollar down (to prevent imported deflation)?
That would make a heck of a lot of sense as a polity approach — one reason why I wrote these words just last Friday:
“Bottom line: This dollar surge … the biggest, fastest increase in more than three decades of record-keeping … is creating an inherently unstable situation. It’s destabilizing emerging market economies. It’s hurting corporate titans here at home. It’s working against the aims of policymakers in a wide swath of government.
“And that’s why I think we’re getting to the point where intervention is all but inevitable. Verbal intervention. Actual intervention. You name it.”
So to sum up:
1. The date of the first “Bloody Wednesday” rate hike is rapidly approaching …
2. That move (and the additional ones that will inevitably follow) will have different impacts on different asset classes at different times — with some rising in value even as others get crushed …
3. The dollar has already soared, and commodities have already gotten destroyed — so much so, that verbal intervention is now beginning. Make sure you don’t get caught by massive, potential reversal/countertrend moves.
Indeed, the euro currency soared more than four full cents from its morning low through its post-meeting high. Commodities took off like a scalded cat, and many of the badly beaten down emerging market ETFs I follow surged!
4. You need to make sure your portfolio is prepared for the mega-trends about to be unleashed by the Fed — because they will be with us for the next couple of years!
I just sent my Safe Money subscribers a Flash Alert dedicated to this very topic. So if you’re one of them, make sure you check it out.
And if you want to add anything else, now that we’ve heard from the Fed, make sure you hop on over to the Money and Markets website to weigh in!
|Our Readers Speak|
I hope you enjoyed the columns from my colleagues over the past couple of days. I was enjoying some time off with my daughters on their spring break. Frankly, it’s hard to believe my “little” girls are getting closer to the end of third and sixth grade!
In response to those columns, Reader Chuck B. offered his take on housing market conditions in his backyard. He said: “Housing prices locally (Baltimore) have risen, but not as much as elsewhere. The local business journal, though, says that apartment rents are rising about 1 percent more than wages are increasing.
“Many downtown high rises have been or are being converted to apartments, even the old B of A building, and more are going up or being planned, along with suburban apartment developments. Millennials are renting, not buying, I understand.”
Reader Tom offered his perspective on conditions not too far away, in the metropolitan Washington area. He said: “Prices are holding steady and the inventory is low. I’m surprised to not see more buyers with the low interest rates that are available.
“Homes in the $200k to $400k range seem to be moving, but the pricier homes are sitting on the market longer each day. Could be the winter weather, could be that people don’t have the down payments, could be fear that an interest rate hike is looming.
“The demand doesn’t seem to be there for the Millennials to buy. Maybe they see that owning a home as a ball and chain to debt?”
Thanks for those comments! Today’s crop of potential first-time buyers is definitely confronting a different economic reality than the generation or two before them. I offered my perspective on some of their challenges in this piece almost a year ago.
With regards to interest rates and currencies, Reader Howard said: “We have a growing economy, people want to lend us money, and we have to keep on raising our debt ceiling. Does anyone seriously believe we are going to raise interest rates in the midst of this currency war?”
Meanwhile, Reader Michael C. said that we’re in for a period of significant turmoil regardless of what happens in the immediate future. His view: “The emerging currency wars will cause completely unpredictable outcomes, and secondary ripples/waves/destruction. I agree … hold on.”
Want to add to the discussion? Then don’t forget to head over to the website and do so in these volatile times!
|Other Developments of the Day|
Israeli Prime Minister Benjamin Netanyahu won a record fourth term in elections this week. President Obama has a relatively frosty relationship with Netanyahu, as do top Palestinian leaders. So the election means Middle East tensions will continue to simmer in the background.
Quicksilver Resources (KWKA, Weiss Ratings: D) became one of the latest, smaller energy firms to file for bankruptcy thanks to the pressure applied by lower oil and gas prices. The firm went into Chapter 11 listing assets of $1.2 billion and debt of $2.35 billion.
Regulators have been applying pressure on traditional banks since the credit crisis, and that has made many of them gun-shy to issue loans to riskier borrowers. One prime beneficiary could be Business Development Companies, or BDCs.
These non-bank financial entities loan money to riskier firms outside of the regulated banking industry, and they pay out generous dividends like REITs do in the commercial real estate business. Goldman Sachs (GS, Weiss Ratings: A-) just launched an IPO of its Goldman Sachs BDC Inc. firm, selling $120 million worth of shares under the ticker symbol GSBD.
Let’s have a moment of silence for the Internet Explorer brand, which will soon be tossed into the dustbin of Internet history. Microsoft (MSFT, Weiss Ratings: B) is researching new potential names for its updated browser, currently using the placeholder “Project Spartan.”
Wondering what’s next for energy shares? Concerned regulators are going overboard with bank regulation? Have any “fond” memories of the wondrous Internet Explorer browser over the years? Then use the website to share your comments with your fellow investors.
Until next time,