Tags: FOMC | Federal Reserve | Axel Merk | bond bubble

Fed Stuck Behind the Curve, Causing 'All Kinds of Havoc' in Assets

By    |   Thursday, 30 July 2015 08:12 AM

As expected, July has passed without the FOMC acting to raise interest rates, as the Fed remained resolutely behind the curve, with some present and former Fed presidents saying it should have acted a year ago.

Speculation grew Wednesday as to whether the Committee will act in September, December, the first half of 2016, later than that, or never.

Axel Merk, president and chief investment officer of Merk Investments, noted that the last paragraph of the FOMC’s communiqué has remained the same as last year, that “even as inflation moves back to what has historically been considered normal, rates will be lower than normal.”

Merk interprets the language as “a promise to be behind the curve.” This writer would say it means that “below normal is the new normal.”

However, Merk finds that this circumstance has not been priced in, that the market is pricing in a “hawkish” Fed.

Merk thinks that inflation and employment have already picked up, “but real interest rates will continue to be low to negative.”

He told CNBC that he expects this to continue to buoy asset prices, expand risk premia, “and this is going to cause all kinds of havoc in various asset classes.”

Merk was asked to comment on former Fed Chair Greenspan saying we’re in a “bond bubble.”

Merk responded that the Fed should have acted a long time ago, and he quoted former Chair Ben Bernanke as saying the Fed should be late to raise rates so as not to “fall back into a deflationary spiral.”

Merk doubts that the Fed “will get back to considerably positive rates before we have to cut again.” Merk is shorting equities in anticipation of greater volatility.

Meanwhile, Jack Ablin, executive vice president and chief investment officer at BMO Private Bank, said what this writer said yesterday, that any Fed rate hike will be “symbolic.”

He finds that “all of the Fed’s extraordinary measures have done a great job to boost Wall Street,” producing a 200% return in the S&P and Picassos selling for over $170 million, but “the most recent doses of QE really haven’t impacted the economy at all.”

He thinks the Fed just wants to “put the markets on notice” the program will “eventually” end, with rates rising only gradually. This writer has warned, however, that the Fed could lose control of the timetable, especially in an election year.

Ablin said that whereas the 10-year Treasury is supposed to track nominal GDP, it is only 2.25%, with nominal GDP estimated at 3%. He expects, as this writer has, “a pretty sharp pop in interest rates” to close this gap.

Sam Chandan, president and chief economist at Chandan Economics, is counting on a “data-dependent Fed” to get more data to support a rate hike. This writer would remind readers that former Philly Fed President Charles Plosser has said the Fed lacks the necessary data to do this.

Looking at the effect of a putative rate hike on equities, Michael Jones, president and chief investment officer of RiverFront Investment Group, expects the Fed to move “faster than the market’s priced in for.”

He thinks Yellen is “truly data-dependent” and any pullback in reaction to an unexpected hike will be a buying opportunity. This writer would add the data point that 2016 is an election year.

Jones predicts the market will “love” a rate hike, because it means the economy has been fixed.

Rick Rieder, of BlackRock, puts the odds at 60-40 that the Fed will move in September. Adam Parker, of Morgan Stanley, envisions “a bit of relief” when rates are raised, and he expects funds to rotate toward financial stocks and away from biotechs.

When Kelly Evans quoted Jeffrey Gundlach as questioning whether the economy is strong enough to raise rates, Rieder disagreed.

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Robert-Feinberg
As expected, July has passed without the FOMC acting to raise interest rates, as the Fed remained resolutely behind the curve, with some present and former Fed presidents saying it should have acted a year ago.
FOMC, Federal Reserve, Axel Merk, bond bubble
630
2015-12-30
Thursday, 30 July 2015 08:12 AM
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