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.
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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