This morning started off much like a New York Jets Football off season. So much promise, so much hope, so much excitement. And then the season starts and everything just falls apart. Of course it wouldn't be a NY Jets season if they didn't win a few games at the end of the year to ensure they won't be getting a top draft pick. That sums up today's trading action. The hope of a new trading day, the reality of a pullback, and a late day rally to screw everything up.
While I am not a NY Jet fan, perhaps all the moves they make in March will lead them to the promise land this coming season, but I do know that, like almost every NY Jet season the last 46 years, the most promising of trading sessions can turn ugly in a hurry. The culprit today remains the run-away dollar. A theme I've been talking about since the start of the year.
It's starting to make sense for everyone now. Just like it took five years for the bears to finally realize QE and ZIRP are going to goose the stock market to record highs. I'll be honest - it took me a few years to come to grips with it. I am far from the perfect trader, but you have to adjust, whether or not you agree with whats going on. The strengthening US Dollar is a common theme and when everyone's talking about something you know its not going to last.
Perhaps the FED will address the stronger dollar in their meeting this week and try to talk it down, which will be tough to do when expectations are for rates to rise. You can't say the dollar is too strong and then raise interest rates. It's akin to trying to lose weight by increasing the amount of food you eat.
We are reaching a point for the FED that I've been waiting for. The old "get your popcorn" moment.
Ever walk around the City late at night and witness all the drunks trying to maneuver their way to their next destination? Rarely do you hear about one of them passing out in the middle of the street and getting run over. Or walking in front of a bus. They somehow make it home.... alive. A seemingly impossible task. They just do. The FED might use the entire sidewalk to get us home. They might stumble on a few key words, throw up a term or two, but as little faith as I had in them years ago, I realize today, that no matter what happens, they will get us home. That home is fresh record high stock prices.
The entire world has taken the unprecedented policies of the FED and run with it. A few years ago the talk was about the US Dollar crashing to nothing. Today the talk is about the US Dollar gaining too much value. It's too strong.
The economy is strong enough to take the training wheels off? Right? Can the FED be patient anymore?
Patient. It seems the term just didn't last long enough. Data dependent, Patient, extended period. I'd like to see patient remain around for another meeting or two. According to every source that has a direct feed to the FED the term 'patient' will be removed this time around.
Patient Panic! Sounds a lot like the Taper Tantrum and every other headwind since the March 2009 lows. The US Dollar is spiraling out of control in an inverted fashion. The Ben Bernancke led FED had it easy. Yellen is going to have to pull something out of her magic hat this coming week. Unconventional monetary policy, zero percent interest rates... if the economy needed more money, just announce more easing. Pledge to keep interest rates long for an extended period of time. We are almost 7 years into ZIRP and now the market is prepping for the first increase of the FED's Fund rate since the Industrial Revolution.
Look at the US dollar rally since last year:
The good news about the US Dollar rally, your shopping trips in Australia cost 40% less.... so you've got that going for you.... which is nice.
How is Yellen and the FED going to talk the US Dollar down, while at the same time committing to raising interest rates? We can go through all the FED meetings since the March 2009 lows and each one seemed like the most important meeting in history. What are they going to announce? How many words are going to change? Will they keep the same language in the policy statement? Will Ben Bernanke crack a smile at the press conference?
It was easy keeping interest rates at record lows and print billions of dollars. The tough part all along was taking it away. You spend six years lavishing your kids with IPADs and fancy clothes and then tell them they've got to give it all back. How is that going to go over?
Ben Bernancke himself did not now the exact outcome of the FED's unconventional measures. With stocks just off new all time highs and the unemployment rate continuing to fall well under the 6% rate Bernanke highlighted years ago as a point where they would start raising rates, the FED risks losing credibility if it continues to feed the economy cheap money. They also risk stoking inflation.
What has worked out wonderfully for the FED is the Eurozone's struggles. The deflation in Europe and the use of their own unconventional measures has helped to keep inflation low here in the U.S.
The solution to the financial crisis in 2008 was to paper over it with an asset price scheme reliant upon record low interest rates and as much unconventional monetary policy as necessary to get the economy back on track. I think that was the easy part compared to what the FED will have to deal with going forward.
A stronger dollar will become a big problem and raising rates will only exasperate that problem. But the FED also risks losing credibility if they don't start taking away the 'punch bowl' and start 'normalizing' interest rate policy.
Will they remove the term "patient" from their policy statement. I think so. But I think they will replace it with another 'P' word. Prudent.
It will be prudent to hold the line on zero percent interest rate policy. I don't think much will change other than the P word. Patient to Prudent. They will raise rates at the right time, or what they think will be the right time. Most are pointing toward June. I think its going to be much many many moons from June before the FED the funds rate, if they even do it at all.
The FED's next step announced this week, will be more of the same and a little less patience. Prudence. You can take that to the bank and earn -.05% on it.
One thought on “Friday Focus – The FED’s Next Step – Prudence”
Very nice thanks for writing it!