Whether or not one agrees that the Federal Reserve is preparing to raise rates again at its upcoming meeting this March, one thing is certain: The Fed has done everything shy of setting its hair on fire to leave little doubt that it is seriously considering doing it.
As of this past Friday, the consensus for (or odds of) such a possibility stood in the high 30s, signaling little to no chance. On Monday, those odds started to nudge up ever so slightly, yet by late Tuesday those odds were pushing past the 70s and heading for 80. Guess what happened next?
We’re now sitting as of this writing at an 82% expectancy rate for the odds of another rate hike in about two weeks’ time. And the “markets” are setting ever-higher records as the day progresses. It would appear the “market” either (A) doesn’t believe the Fed, or (B) no longer cares. I believe it’s (A), and that’s a very big problem.
Just yesterday, I wrote an article stating that the time to watch China ever the closer was right now, in light of recent Fed pile-on for March “live” considerations. One of the references I used was the addition of two more Fed presidents taking to the airwaves to project the idea that March indeed was, and should be, taken as “live.”
I hadn’t but hit the publish button when two additional Fed presidents waded into the fray, Here’s a recap. To wit:
- Fed’s Dudley (Voter, Dove) said the case for rate hikes is more compelling.
- Fed’s Kaplan (Voter, Neutral) said the rate path is more important than the timing of the next hike.
- Fed’s Williams (Non-Voter, Hawk) sees a March hike getting serious consideration. Williams also added he still is comfortable with 3 hikes this year and does not see the need to delay a rate hike.
- Fed’s Bullard (Non-Voter, Dove) stated that the Fed has essentially reached its dual mandate and should allow the balance sheet to normalize naturally. Bullard also added that the policy rate can stay relatively low over the horizon, and that he still expects 2% growth, thus there is no reason to be aggressive on rate hikes.
Just to reiterate – that’s on Tuesday. Do you think there’s some messaging to be taken here? Especially right before the President’s first budget ideas speech before congress? Or is that all “tin-foiled cap wearing” “conspiracy theory” talk?
Let me ask it this way: Did you get the idea from any Fed communication – whether it was written, spoken, televised, or more via any official – that the economy had turned such a corner that it warranted an immediate return to raising rates in earnest?
Yet, what else is one to conclude when reading the above – dovish? Hardly. As a matter of fact, it could very well be construed as a Fed hell-bent on sending the administration the message that it likes to be the one in control, and has no intention of letting that position go.
I believe we are at a dangerous crossroads for both the economy, markets, as well as a geo-political calamity or fallout. And the one who seems absolutely clueless as to how dangerous it actually is, is the Federal Reserve itself, for it is setting the table for just that – all while leaving its fingerprints everywhere.
Here are just some of the current issues which could trigger the unexpected, from anywhere:
- The president did indeed give a bold budget speech, and so far, has been well received by even his critics. That reaction has done two things. First, the dollar vaulted higher rather than lower. That, in and of itself, is something to take notice of. Second, the “markets” are in what can only be called a horns-over-hooves buying frenzy, with all-time high records falling as fast as wounded “bears” can scurry.
- Against this backdrop, the Federal Reserve has come out with what seems like more speakers with megaphones than at any protest march as to make sure everyone within earshot knows: March is “live,” so don’t say we didn’t warn you. And the “markets” aren’t paying them a bit of attention.
- China received no respite from its current issues of capital flight. First, the dollar strengthened therefore exacerbating (once again) the cross-rate issue China is battling tooth-and-nail, while throwing the “kitchen sink” and whatever else isn’t nailed down at the issue. And it’s about to get worse. A lot worse if more pile into the dollar for whatever is their reasoning.
Any “market” calamity from this point on sits squarely on the Fed’s doorstep, all via its own doing; for this time, not only is it crying “wolf” (e.g., rate hike imminent), it’s screaming it in unison, and is continuing to do just that.
To now not raise? All credibility (no matter how little remained) will be lost. Period, end of story.
And the “markets” as well as the economy are positioned for? (I’ll just pause here to let you think about that in a little more depth on your own as you look at any current index.)
It categorically and completely allows the president to say – using the Fed’s own words, speeches, assessments, and more from as recent as just little over 90 days ago – that it is the Fed which caused any market reversal. And he will have the Fed’s own words and actions to back up those claims. And those claims (and accusations) will come – count on it.
So now we’re all to sit back and wait to see who blinks first: The Market? China? Or the Fed?
The Fed has spoken. March should not only be thought as “live,” the signaling is showing it should be taken as a near certainty.
But so far, the “market” doesn’t believe them. The real problem is, does China? Or worse, can China stand (or afford) not to?