The Fed has Spoken, but Markets Say Something Else

Bloomberg called it “a hawkish hold” because in her postgame press conference, Fed quarterback Janet Yellen all but promised an interest-rate increase would come at the December FOMC meeting.

That’s nice symmetry. Remember, it was December 2015 when the Fed started the process of “normalizing” monetary policy. And in spite of their fearless forecasts for two to three more rate ratchets in 2016, the Fed will likely end up with just one more quarter-point bump on December 14. Happy Holidays!

The Fed statement didn’t contain anything really new, with officials noting improved economic conditions, except the desire to wait for confirming economic data before making any rate move.

They’ve been waiting a long time, nearly a year now. There would not have been any drama at all if not for three Fed policymakers dissenting in favor of an immediate rate hike. So it’s pretty clear that a compromise was reached to go in December.

At the end of the day, it just doesn’t matter what the Fed does or says as their credibility wastes away.

Janet Yellen and other Fed leaders have delusions about their own power.

That’s because, as my colleague Larry Edelson is fond of pointing out, the Fed doesn’t really control interest rates anyway, the financial markets do. The Fed typically follows the lead of interest rate markets, not the other way around.

And markets aren’t waiting on the Fed. Markets have ALREADY started raising interest rates.

My colleague Mike Larson did a great job pointing out recently how short-term LIBOR has risen considerably over the past year.

While the official Fed-funds rate remains stuck at 0.25%,

1-year LIBOR, which is used as a benchmark for plenty of adjustable-rate loans, surged to 1.5% at the end of August, up from just 0.5% two years ago!

Granted, some of the move can be in reaction to new money-market-fund rule changes slated for next month, but a full 1% gain in LIBOR tells me it’s much more than that.

Or take a look at this chart …

This shows you 5-year inflation expectations in the U.S.; basically 5-year Treasury note nominal yields minus inflation-indexed Treasuries 5-years forward.

It’s clearly in an uptrend since February and it’s telling us loud and clear that U.S. inflation expectations are on the rise.

In other words, regardless of what the Fed says or what policymakers think they see in the data, the bond market is already pricing in higher inflation and higher interest rates.

The market has spoken and is raising interest rates in spite of official Fed policy.

And if markets keep hiking interest rates at this pace, we’re likely to see the long-awaited stock market correction many investors are fearful of.

Brexit winners & losers: Following the U.K.’s vote to exit the European Union, analysts say it’s only a matter of time before the City of London gets displaced as Europe’s pre-eminent financial center, including the ability to clear euro-denominated credit swaps, which is big business.

France and Germany are the front-runners to assume European financial leadership, according to a Bloomberg report in The Washington Post, which sets up “a battle that’s been brewing since before the referendum.”

The Bloomberg report continues: “U.K. Chancellor of the Exchequer Philip Hammond pledged earlier this month to protect London’s status as the epicenter for European trading in interest-rate swaps, accounting for about 39 percent of the global market. Banks are skeptical he will succeed after French President Francois Hollande and senior German lawmakers said clearing in the common currency belongs in their countries instead.”

Wall of worry: With the latest production of the Fed follies now out of the way, investors can turn their full attention to the next known-unknown to worry about: The too-close-to-call November election!

In fact, according to a Bloomberg article, there is a very long laundry-list of things to worry about, including the ongoing profit recession on Wall Street, and high stock market valuations. It won’t be long before investors have something new to worry about.

Good investing,

Mike Burnick

Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.