Weekend Reading: Yellen’s Line In The Sand

By Lance Roberts of Real Investment Advice
Friday, May 20, 2016 9:11 AM EST

Yellen-Line-052016-2

This past week, the big news for the market was the release of the April 27th FOMC minutes which once again suggested the Federal Reserve may be on a path to hike rates sooner rather than later. The reality is simple, with the markets hovering on critical support, a Presidential election just around the corner and no real evidence of economic recovery, the likelihood of a rate hike in June is approaching zero.

Here are some key highlights from the meeting minutes:

“Participants generally agreed that the risks to the economic outlook posed by global economic and financial developments had receded over the inter-meeting period.

Participants also raised concerns about “unanticipated developments” associated with how China manages its exchange rate.

Still, Fed officials signaled they weren’t overly worried about the apparent [Q1 GDP] slump, judging it was temporary and “could partly reflect measurement problems and, if so, would likely be following by stronger [gross domestic product] growth in subsequent quarters.”

The view wasn’t unanimous. Some officials worried that softness in consumer spending and declines in business investment may be a sign of a more persistent slowdown in economic activity.”

There is a tremendous amount of “hope” built into those statements. And despite the continuing call of economic growth which has remained terminally elusive, the Federal Reserve is faced with numerous challenges ahead.

The central bank already missed the “window of opportunity” for normalizing rates in a manner that doesn’t hamper the recovery. This is evident when you look at Janet Yellen’s proprietary index that Yellen herself has stated as critical for Fed movement.

LMCI-chart-momentum2

As I have repeatedly discussed in the past, since payrolls tend to track corporate profits by about six months AND the small business confidence gauges are in decline, there will be weakening, not strengthening, in employment as the year progresses.

Such a slowing in payrolls will put the Fed in a difficult position since their entire premise on hiking rates has been a rise in inflation to 2% and a fall to 5% in unemployment. Both have now been achieved. This is why, when combined with a forthcoming Presidential election, the Fed will likely remain quite permanently on hold.

As Rick Reider at Blackrock recently summed up:

“To be sure, we live in a world that always has risks and headwinds. But given the many headwinds to Fed movement today, the central bank could have taken the opportunity to move earlier in the year when the headwinds weren’t as strong and it was being aided by historically easy global monetary policy in Europe and Japan.

Now, the central bank is left with a more difficult set of decisions going forward, as it weighs the costs and benefits of maintaining interest rates at ’emergency conditions.’”

For Yellen, it is critical the market holds the current level of support. A break below that level will certainly send markets lower looking to retest February lows once again while completely derailing the Fed’s plans for hiking rates.

Anyway, here is your reading list for the weekend.

CENTRAL BANKING & CHINA

THE MARKET & ECONOMY

INTERESTING READS

“The increase in the assets of the Federal Reserve Banks from 143 million dollars in 1913 to 45 billion dollars in 1949 went directly to the private stockholders of the [Federal Reserve] banks.” – Eustace Mullins

Some things never change.

Disclosure: The information contained in this article should not be construed as financial or investment advice on any subject matter. Streettalk Advisors, LLC expressly disclaims all liability in ...

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Moon Kil Woong • 9 years ago • Contributor's comment

I agree, the Fed has been playing the stock market and encouraging banks and others to buy it. Sadly, something takes precedence to this metric, inflation. Although they said they want inflation, it is just a lie to give an excuse as to why there is no growth. Inflationary growth is not growth, it's just monetary games. As inflation now gets underway with little growth, the Federal Reserve must turn to shut it down before people realize how much worse no growth with inflation is and how the Federal Reserve is enriching banks. It becomes all to clear the monetary transfer when growth is near zero, inflation is at 2% or higher, and banks are munching on zirp money until the middle class and elderly go broke.

The Fed says there is no cost to free liquidity, bull puckey. It's bad enough that it has denied people decent returns on capital. With inflation, it steals value from your pocket daily.