In response to an FT View on 15th December 2015, entitled 'The Federal Reserve may be jumping the gun - the argument for an interest rate is now not a compelling one'
"Even after the extraordinary turmoil of the past decade, the Fed still sets interest rates according to the same basic model as before the global financial crisis"
Which is one of the main reasons that we had part one of the global financial crisis in the first place, and will soon be a major cause for the arrival of part 2. ZIRP and QE have achieved the following:
1. Repaired the balance sheets of the banks
2. Aided and abetted governments to spend another decade in denial
3. Provided leveraged casino chips to system insiders and facilitated a massive transfer of wealth from the poor to the rich
Fed policy has done very little, if anything to lead to 'the US economy...growing steadily and sometimes robustly for nearly five years' , mainly because it hasn't and it isn't. It has grown consistently below trend, even with the assistance of an inflated GDP methodology and a deflated CPI methodology.
Coming to the 'will she/won't she', 'should she/shouldn't she' debate, my view is that if they could find an excuse that didn't blow what little bit of credibility they have left - they would take it. As for and the 'data dependent' rationale, it is, and has been for months, total bunkum. They have backed themselves into a corner and are solidly in 'survival mode'.
Why do I say this, apart from all the 'previous' they have on ducking the issue at the last minute? There was a line in the Fed minutes from October that has received little or no attention from the mainstream financial media who pore over the meaning of every little word like it was the wisdom of Confucius, but strangely haven't found the following to be of any interest:
"A decision to defer policy firming could be interpreted as signalling lack of confidence in the US economy or erode the committee's credibility"
That’s the data they are dependent upon - They are worried about their credibility...and well they should be. The only thing that has kept these markets heading north since QE3 has been the idea that 'the Fed has our back'. Take that away and you have what is left without it - a stock market that is being held up by 10 stocks, the trannies now down 20% from their highs, an impending crisis in junk debt, etc. etc...All taking place within a debt sodden economy with the highest non-participation rate since the seventies, a declining manufacturing sector, an inventory to sales ratio at it's highest since 2009...a full six years into an expansion phase.
They have backed themselves into a corner. What can they do?
a) If they do NOT raise rates, those Fed minutes will look prescient, which would be a first for the Fed, but not the kind of first they are looking for - game over
b) If they DO raise rates they will have to cross their fingers, hold their noses and spend the next 6 months sending a committee member out every single day re-emphasising that there are no more hikes on the table. If the markets get even the slightest hint that there is more - game over
c) If they do raise rates and we have something unexpected that causes them to reverse...like...oh I don't know, maybe an inch of snow in January...the same old excuses will not work this time - game over
My own personal 'happy-clappy' view is that it does not matter much what they do - the damage is done. You cannot spend decades expanding debt at multiples of GDP and expect to grow your way out of the consequences.
So, in conclusion, and to end on a brighter note...not...we've never had a bear market driven by algos before. Those things are trend driven, they create air pockets, and they are relentless...when this market finally gets that the Fed is not in control, has no credibility and has NOT got it's back, the algos will not pause for breath and will not give a dime about data dependency, forward guidance or calls for calm.