Today's FOMC Decision Guarantees That The Federal Reserve Will Not Raise Interest Rates In 2015
On Wednesday we predicted that the Federal Reserve would not raise interest rates in 2015. Our reasoning was as follows:
- From a politician's perspective, hiking interest rates would leave Janet Yellen and her colleagues politically exposed.
- Hiking rates would cause the USD to appreciate even more, which the Fed doesn't want to see happen.
- Inflation is ridiculously low right now.
To be honest, our prediction was mostly just a guess. But since our reasoning was solid, it seems like our prediction will hold true for the remainder of 2015.
After today's FOMC decision, it's pretty clear that the Federal Reserve will not raise interest rates in 2015. Here are a few additional reasons that are now obvious.
Yellen could have raise interest rates a long time ago. Today's FOMC decision shows that she is a permanent dove.
- The U.S. economy was on fire in 2014. Yellen kept delaying the first interest rate hike even though the U.S. economy was strong enough to withstand anything in 2014. If Yellen isn't going to raise rates when the economy is strong, there's no way she'll raise rates now that the economy is weakening.
- The Fed had another great opportunity to raise rates in June 2015, but it didn't.
- Yellen is willing to use any excuse to hold off on an interest rate hike. David Tepper said it best: a 0.25% rate hike is not going to impact the economy at all. In fact, a 0.25% rate hike is more like a 0.15% rate hike considering where rates are now. But the instant the stock market falls 10% - BAM - Yellen slams the brakes on interest rate hikes. The U.S. economy will never be in perfect condition, which means that Yellen will always be able to find an excuse to delay a rate hike.
- Yellen is playing fast and loose with the market. All summer long she was leaking hints that the Fed would raise rates soon. That's why Professor Tim Duy from the University of Oregon said that even if the Fed doesn't raise interest rates in September, it would at least make it clear when the first rate hike will be. What did we get from the Fed? Nothing. No hint, no nothing.
- The Federal Reserve's expectations for future inflation have been lowered. Since the inflation rate is one of the key data points that the Fed is watching, this postpones a rate hike even further.
Now here's why the Fed's dovish message is bearish for stocks.
We all know that the Federal Reserve will need to raise interest rates some day. Rates cannot remain near zero forever. The longer the Fed postpones a rate hike, the more jittery investors and the market will get.
The market is not afraid of a rate hike. Everyone knows that a 0.25% increase is inconsequential. If a 0.25% increase really does cause the economy to collapse, then we must be living in an economy that's being supported by toothpicks. The announcement of a rate hike might very well be seen as "all the bad news is out, let's buy stocks".
On the contrary, markets are afraid of uncertainty. Yellen is clearly not as adept at managing investors expectations as her predecessor Bernake was. Bernake was very good at communicating future monetary policy decisions with investors. He understood the golden rule "investors aren't afraid of tight monetary policy. Investors are afraid of uncertainty".
On the other hand, we have Yellen leaving everyone in the dark. The uncertainty as to when the first rate hike will be is like a dark cloud that hangs over the market.
So either Yellen should raise rates now (which she did not) or she should make it clear when the first hike will be. The longer she keeps investors in the dark, the longer this bearish cloud will hang over the market.
We are currently sitting on 100% cash. We're waiting to buy stocks.
Nicely done. I've added you to my follow list.