Tags: Fed | eurozone | rate | Greece

Eurozone Train Might Lose a Wheel or 2 Soon

Wednesday, 27 May 2015 11:16 AM Current | Bio | Archive

Richmond Federal Bank President Jeffrey Lacker, who votes on the Federal Open Market Committee and is known as an uber-hawk, recently stated: "What I've said is that a case [for raising interest rates] might be strong in June. I still think that's possible. But as I said think, I haven't made up my mind about June." Lacker also added that there are risks in moving "too late."

It's interesting to take notice that Lacker's persistence favoring early rate increases comes after several other Fed members have also given hawkish comments lately.

Last Friday, Fed Chair Janet Yellen said in a prepared speech: "I think it will be appropriate at some point this year to take the initial step to raise the federal funds rate target and begin the process of normalizing monetary policy. . . . However, I will need to see continued improvement in labor market conditions, and I will need to be reasonably confident that inflation will move back to 2 percent over the medium term."

On Tuesday we learned Yellen does not plan to attend this year's high-profile Federal Reserve Bank of Kansas City's Jackson Hole Economic Policy Symposium that will have as its topic "Inflation Dynamics and Monetary Policy." That symposium takes place from Aug. 27 to Aug. 29, which is only three weeks before the Sept. 16-17 FOMC meeting that will be followed by a press conference by the Fed Chair. To me, not a big surprise Yellen prefers staying away from Jackson Hole.

In the meantime, Loretta Mester, president of the Cleveland Fed who will be a FOMC voting member in 2016, said in an interview: "If the data comes in according to my forecasts then the time is near where we're going to be wanting to raise rates." She also stated: "Recent experience has renewed the discussion of how central banks should respond to emerging systemic risk. . . . When financial markets are not functioning well, the transmission of monetary policy to the economy can be disrupted. . . . The FOMC has recognized that nonconventional monetary policy, including large-scale asset purchases and the extended period of essentially zero interest rates, could pose potential risks to financial stability by affecting market functioning and spurring risk-taking in a search for yield."

In simple words and with what we know today, the first Fed rate hike, which will impact developed as well as emerging markets, seems to be definitively on the table before the summer is over (Autumn starts on Sept. 23).

Maybe it's good to keep in mind a correction in U.S. stock markets could happen.

That said, Greece is closing in on hitting that proverbial concrete wall of defaulting on its debt payments and if it doesn't default in the next few weeks it will be only a question of time before it finally will, which shouldn't come a surprise to anybody.

What will happen thereafter, and here I mean from months to even years, is anybody's guess, but I think it could be better not to expect positive fallouts for the eurozone as a whole as there are various Mediterranean eurozone member states that could get (wrong) ideas from Greece's case (contagion).

Anyway, for the moment the sinister Greece-EU-IMF "game" continues where Greece blames the EU and the EU won't compromise without the IMF being involved and the IMF saying Greece continuously fails to comply with its promises/obligations.

The big error investors have made since the start of the euro in January 1999, has been that they have believed northern Europe would effectively guarantee southern European spending despite the fact that the treaty made it quite clear this has never been the case.

The first real warning came on Jan. 6, 2010, when then ECB Executive Board member Jurgen Stark told the Italian financial daily Il Sole 24 Ore: "The markets are deluding themselves when they think at a certain point the other member states will put their hands on their wallets to save Greece."

Of course then we got ECB President Mario Draghi who said on July 26, 2012: "Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough," which was clearly not an explicit promise the ECB would act as the conduit for a guarantee on southern Europe's debt, but, unfortunately, that's how the vast part of investors did understand it, wrongly of course.

By the way, on Wednesday, the European Central Bank left the level of emergency cash available to Greek banks unchanged from a week ago.

Because of all that, it could be wise as an investor being prepared in case the Eurozone train loses a wheel or two over the short to median term.

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Richmond Federal Bank President Jeffrey Lacker, who votes on the Federal Open Market Committee and is known as an uber-hawk, recently stated: "What I've said is that a case [for raising interest rates] might be strong in June."
Fed, eurozone, rate, Greece
Wednesday, 27 May 2015 11:16 AM
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