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I’ve seen a lot of Federal Reserve meetings come and go in the 18 years I’ve been closely following the interest-rate markets. But few have been as momentous as the one that will begin next week on Sept. 16.
That’s because Fed policymakers will have to decide whether to raise short-term interest rates for the first time since June 29, 2006 – with all the potential, resulting market turmoil it may unleash. Judging by what has already happened ahead of that two-day meeting, there could be tons of it.
Think about it: The Fed has spent nine years and three months in easing mode. It has slashed rates to the bone, printed trillions of dollars out of thin air, and forced investors (kicking and screaming) into the most esoteric, highest-risk, overvalued securities in an attempt to kick-start economic growth.
Even the elimination of QE here didn’t technically end the easing process – the Fed has continued to invest the proceeds of maturing bonds into new bonds. And the Bank of Japan, European Central Bank and other foreign institutions were more than happy to pick up the slack.
But now, we’re closer to a hike than we’ve been at any time since a year before the first iPhone hit the market … The Departed wowed gangster film enthusiasts … and (ironically enough) free-market economist Milton Friedman died.
Several Fed officials have already come out and strongly suggested they want to raise interest rates, but are worried about recent events in China and the potential impact of a rate rise on the value of the dollar. That includes Vice Chairman Stanley Fischer.
Other policymakers have basically said they would push for a rate hike no matter what. That includes Richmond Fed President Jeffrey Lacker and St. Louis Fed President James Bullard.
The rest of the world has had a lot to say, too. The Financial Times carried dueling articles on Wednesday from former Treasury Secretary Larry Summers and former Dallas Fed President Richard Fisher. Summers asked the Fed to hold off, while Fisher urged the Fed to just get it over with already.
The chief economist of the World Bank also just warned the Fed that raising rates could cause “panic and turmoil.” That echoed cautionary remarks a few days earlier from the head of the International Monetary Fund (IMF).
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| We could see huge amounts of volatility and wild market moves when the Fed’s decision is released next week. |
In short, everyone and his sister has an opinion on what the Fed should and will do – not just here in the U.S. but around the world. That means there’s no consensus in the markets, and that one side or the other will almost certainly be disappointed. As a result, we could see huge amounts of volatility and wild market moves when the decision is released.
Personally, I believe the Fed should have started raising interest rates a few quarters ago. Economic and market conditions clearly warranted it. They chickened out at the time, and now I believe there’s a 60%-70% chance they end up hiking right into the teeth of a significant global crisis and a possible U.S. economic slowdown.
Speaking of which, we’re already seeing a ton of the “Bloody Wednesday” market events I forecast months ago … just as a result of the Fed talking about possibly hiking rates. That shows how risky and unstable today’s economic and market backdrop is.
It’s also why I continue to recommend you take prudent steps to protect your capital – regardless of whether the Fed does or doesn’t hike next week. We’re in a new market paradigm, one where investors can no longer count on the willingness OR ability of central bankers to save them every time they get in trouble. And that means you have to change your way of thinking and investing if you want to prosper.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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Mike, I personally think you’re overly focused on the Fed (as are many investors). The Fed has certainly played a role, but the main reason for this multi-year bull market are corporate profits (the “mother’s milk” of stocks). Even if the Fed raises rates by year’s end I still think the bull market continues if corporate earnings and profits remain healthy. There are signs that the economy is slowing and profits are declining, which is of bigger concern to me.
Mike
As many will appreciate, we live in a world economy where many of our multinationals do business. It’s not enough for the FED to pretend that things are charging along domestically, when a great deal of our business is done overseas. The FED should never have stuck their noses into this, in the first place as it was not their job to take away market risk and prop up the GFC. We are all now watching investors wavering on their risk appetite.
Howard, your right the FED, should not only stuck their nose in it, they should be abolished. They came about because of a secret meeting at Jekele Island in the dead of the night. If JFK, Kennedy had not been killed they would have been. He was talking about doing away with them.
I think the various Fed governors are sending out diverging opinions deliberately to keep the stock market off balance. Moreover Janet Yellen is too weak to control the various players.. Previously only the chairman spoke for the Fed and Greenspan said nothing that anyone could understand while Bernanke didn’t say much at all. Now we have just the opposite. What is really ironic is that a quarter point increase in rates is not going to make much difference to corporate profits or bond prices. The problem is that everyone is playing musical chairs with their money and are afraid to commit themselves past lunch time.
A bigger concern is all the bad debt coming to roost from Oil Fracking Companies that borrowed $5 Trillion, back when Fracking was Profitable.
People are getting laid off from the oil industry.
The housing market, $1 Trillion in Subprime loans… Oil Industry has $5 Trillion in subprime loans…. It doesn’t take a genius to figure out where this is going.
The FED is not going to risk throwing the Global Economy into a Deep Depression by raising rates until at least 2016. If by some surprise they do, hope You are all in CASH because SWHTF!
By 2016, the Global Slowdown will come to roost, and the FED will announce as a precaution they are shifting away from raising rates to another round of QE.
Me, I’m watching Oil Prices / Oil Sector balance sheets. That is where the real problem is coming from.
What is the Feds going to do? Who knows, does it matter? This is all about who will gain the power to rule. The Feds have tried and failed. And we have only been too willing pawns in the hands of the wanna be powers. Economic turmoil is just another means to an end. What is happening now is like reading old prophecies coming to life, will we survive? A few will, many others will be casualties of this powerful gambit played out behind the curtains. For the wanna be powers to gain full control, they are now playing their economic gambit, once the dust settles, cash will cease to exist as is (by popular demands). Electronic cash will be the norm of the day. A truly frightening scenario, as control of the human populace becomes absolute. Woe to mankind, there is no escape. Yes prophecies do come true.
Erik, yes it is pretty unsettling, kind of reminds me of the movie, The Wizard of Oz, pull back the curtain, and see who’s there.