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Commentary

The Fed Wriggles Out By Removing “Patient” From Statement

The Fed went a little crazy yesterday. They didn’t want to spook the market, but they did want to say okay we’re not really in a zone that says we are going to endlessly print money any more. Because printing money is what the world has assumed is what can be had for breakfast, lunch and dinner. And any such note would have been disastrous so they had to choose carefully what they would say.

The consensus was that they would remove the word “patient” from their outlook. They did. If you ever thought, when you were in school, “what difference does Grammar make?”, then this is your lesson – just one word is what half the world was looking for.

But the rest of the statement is basically a scared Fed trying to wriggle out of this crazy position. Everything is leveraged. They know it. The economy is on steroids. You can’t take away the steroid. Even if you say the economy is strong enough, it is unlikely to sustain it. So you have to do everything in your power to NOT stop the steroid. That Fed is in that position.

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(Image sourced from here)

So while it “threatens” to cut rates by removing words like “patient” it is essentially a wuss and will not hike rates. Why should it? Everything’s fine as it is. Rates would likely be hiked only to stave off inflation, which shows no signs of being even present in the building, let alone the classroom. With the shocking drop in crude prices, the only time inflation will appear is after October (when, in 2014, prices plunged). If inflation “rears its ugly head” at that time, it would be a more likely reason to increase rates.

If they increased rates because of inflation, that means inflation data would already have come. Market prices would already have adjusted downwards – falling stocks and falling bonds – in anticipation of an obviously imminent rate hike. If the market hit has already been huge, then a rate cut is unlikely and will be delayed because, as we have seen, the Fed is a wuss.

Will they increase rates based on unemployment falling? Why should they? Less unemployment and no inflation is perfectly fine. With less than 2% inflation, there is simply no point raising rates.

When they do cut rates: The dollar’s strong and will get stronger, and because the US imports a lot, it will reduce the prices (in dollars) of things they import, which keeps inflation lower. So if there is a rate increase, it will be slow and prolonged and delayed. Such a situation is not a huge source of worry for India, as it seems to have been in the last few days.

The biggest impact of the Fed Move is the fear of the Fed Move. Sentiment drives markets. Today’s move must have been the fear, mostly. Until markets correct 10%, there’s nothing to worry about – and we’re only down 5% from the top.

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  • Samarth says:

    Hi Deepak
    Might be slightly off topic,
    I am just curious. From what I have read over last few years that Fed is printing dollars like crazy. I know that there are lots of factors that come in to play to determine currency exchange rate (which is supply demand based). I am just wondering that if they keep printing more and more dollars, eventually dollar should get weak compared to others.
    Am I missing something in my logic ? When is “eventually” is a guess but it should however actually dollar has become stronger and stronger compared to several currencies.
    Samarth

  • Gold Bug says:

    How long this competitive devaluation can go on? From China to Japan to Euro everybody is exporting deflation to the market of last resort (USA). But even inside US only about 20% of Households have benefitted from asset price increases in the last 6 years. Rest of the population in US is broke on Credit Card, Auto and Student Debts. Banks in US are still not lending to low FICO score borrowers. US companies have resorted to huge stock buybacks using cheap money by selling Bonds. The Insiders inside these companies are selling off their stock as they get good value in stock buy backs. So these big US Corporations are artificially propping up their stock price. When will this malinvestment bubble Pop? What will happen to Indian Stocks and Bonds when FIIs pull out when bubble pops? What we small fries can do in such doomsday scenario? Lot of questions but no one knows clear answerrs as we are just bothered about minute to minute developments.