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  • Will The Fed Raise Rates Tomorrow? Probably Not

    The Federal Reserve’s policy setting body, the Fed Open Market Committee (FOMC), is meeting today and tomorrow, and there is widespread speculation over whether or not the Committee will vote to raise the Fed Funds rate a second time since lift-off in December.

    Late last year the Fed signaled that it intended to raise the Fed Funds rate four times in 2016, most likely at the March, June, September and December FOMC meetings. Yet the Fed could not have anticipated the global stock market debacle that ensued at the beginning of this year and into February.

    Given the large and unexpected global equity sell-off we saw in January and early February, most Fed-watchers recently concluded that the FOMC would abandon its plans to hike rates four times this year. Many even speculated that the Fed might reverse course and lower the Fed Funds rate back to near zero. Some even suggested the Fed should implement another round of quantitative easing (QE).

    I have been among those who have suggested the Fed should delay any further interest rate hikes until the economy shows more signs of improvement. However, a recent economic report will make it much harder for the Fed to delay another rate hike tomorrow. That will be our main topic today.

    Following that discussion, I’ll have more to say about negative interest rates, the War On Cash and a summary of Stratfor.com’s latest analysis regarding this very concerning global trend. Let’s get started.

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  • Fed Set To Pull Trigger Tomorrow - A Good Thing Or Bad?

    The Fed Open Market Committee (FOMC) which sets US monetary policy convened in Washington this morning for its last meeting of 2015. It is widely expected that the Committee will vote to hike the key Fed Funds rate for the first time in almost a decade before the meeting concludes tomorrow.

    The FOMC slashed the Fed Funds rate from 5.25% in late 2007 to near zero by late 2008 during the financial crisis and recession. It has kept the key lending rate at 0.00% to 0.25% ever since in an effort to stimulate the economy, in addition to buying an unprecedented $3.7 trillion in Treasuries and mortgage-backed securities in a process known as “quantitative easing" or QE.

    It is not entirely certain that the FOMC will hike the Fed Funds rate tomorrow, but that is the prevailing consensus. Based on the minutes from the last FOMC meeting in late October, which were released on November 18, it is clear that Fed Chair Janet Yellen has a majority of FOMC voting members ready to support a rate hike if she chooses to do so.

    It is also not entirely clear how much the Committee might raise the Fed Funds rate should it decide to enact “lift-off” tomorrow. The prevailing consensus is that the first rate hike would be only 25 basis points (0.25%), but the Fed has provided very limited guidance as to the size of the expected increase. Assuming the rate hike is only 25 bips, the other question is from where – the Fed Funds rate is currently just under 0.15%.

    There are strong arguments on both sides of the lift-off issue. Many believe the Fed has already waited way too long to start normalizing interest rates and are adamant that lift-off should begin tomorrow. Many others, however, believe that the economic recovery is still too weak and the Fed should delay lift-off until sometime next year at the earliest.

    It is these two arguments that we will discuss today, ahead of tomorrow’s key decision. But before we get to that discussion, let’s do a quick review of the makeup of the Fed Open Market Committee, the most powerful monetary policy body in the world.

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  • Thursday’s GDP Report May Hold Big Surprises

    The next few days should be an interesting time in the markets. The Fed Open Market Committee (FOMC) is meeting today and tomorrow and will release its latest policy statement at the conclusion of the meeting. While it is not expected that the Committee will vote to raise the Fed Funds rate at tomorrow’s meeting, Fed Chair Janet Yellen has been talking hawkishly about a rate hike of late.

    Friends, business associates and clients increasingly ask me: Why is the Fed so intent on raising interest rates? The US economy is not that great, the global economy is slowing down, inflation is practically nonexistent and commodity prices are signaling deflation. So why on earth is the Fed hell-bent on raising rates when much of the world is doing just the opposite? I’ll tell you why as we go along today.

    Then on Thursday, we get the first estimate of 2Q GDP from the Commerce Department, and there is an unusually wide range of pre-report estimates. While there is broad agreement that the economy bounced back after the disappointing 1Q rate of -0.2%, some forecasters believe the 2Q estimate will be less than 1%, while others believe it will be north of 3%. That’s a huge spread! The Atlanta Fed’s rolling “GDPNow” indicates 2Q growth of 2.4%.

    Yet perhaps the most important news of this week will be the Commerce Department’s annual revisions to its GDP numbers going back several years on Thursday. While such revisions happen every year, this year’s revisions and changes are expected to be more significant than usual as the government tries to smooth-out “seasonal adjustments.” Many expect that the 1Q GDP estimate of -0.2% could be revised to a slightly positive number. This will be big news.

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  • Fed’s Getting Anxious About Interest Rate "Liftoff"

    While I have been a Fed watcher for over 30 years, rarely have I seen as much media angst over the central bank’s next move as we are seeing today. We all know that the Fed is going to raise short-term interest rates at some point. We expect the Fed to “normalize” interest rates slowly in measured steps over the next few years. The main question is, when does this process begin?

    The other question is, what effect will the eventual interest rate increases have on the stock and bond markets and the economy? While the Fed has made it clear that it intends to end its “quantitative easing” (QE) policy by late October, and that it will start to raise rates sometime next year, stocks and bonds have been on an upward tear all year. Stocks are at record highs, and bond prices have risen when most forecasters expected them to go down.

    When Janet Yellen took over as Fed Chair earlier this year, she suggested that the Fed would not begin to raise short-term rates until at least six months after QE ends. Most analysts assumed that meant no interest rate hike until at least April or May of next year, or even later. However, the minutes from the July 29-30 Fed policy meeting released last week suggested that several FOMC members think a rate hike should occur sooner.

    This revelation (dare we call it that) set off quite the buzz among financial writers over the last week. The concern is that if the Fed raises interest rates too early, that could choke off the feeble economic recovery. Yet while some financial analysts sounded alarm bells over the possibility that the Fed’s interest rate hike might happen sooner than expected, the markets seemingly could care less. That’s part of what we’ll talk about today.

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  • Fed May Have An Unexpected Surprise In Mind

    My readers know that the global financial world is waiting with bated breath for tomorrow’s Fed decision on whether to start to “taper” QE purchases now or wait until next year. The Fed’s Open Market Committee (FOMC) is holding its last policy meeting of the year today and tomorrow, and Chairman Bernanke will hold a press conference afterward.

    The latest surveys indicate that most Fed watchers believe the FOMC will wait until next year to taper, but that remains to be seen. What is actually more interesting is some language that was buried in the minutes from the October 29-30 FOMC meeting. The minutes were released on November 20.

    Within those minutes, we find that the FOMC is considering lowering or removing the interest paid to commercial banks on money they choose to leave on deposit with the Fed. The minutes reveal that at the late October policy meeting, the Committee members discussed the possibility that the FOMC might reduce or eliminate the 25 basis-points of interest the Fed pays to big banks that leave excess reserve deposits at the Fed. This is potentially very big!

    Why would the Fed do this? The minutes suggest that the FOMC believes that reducing or eliminating the interest paid to commercial banks would spur those banks to draw down those deposits and use that money to make more loans, thus stimulating the economy – and pave the way for the Fed to start its QE taper. This is extremely interesting. I’ll lay it out for you today.

    But before we get into that discussion, I’d like to analyze the latest two-year federal budget that was passed by the House last week, and may pass the Senate as early as tonight. The bipartisan budget deal was hailed as a major victory by lawmakers and the White House. But as I will explain below, the latest budget deal represents a sell-out by both political parties.

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  • GDP Report Tanks – Is A Recession Looming?

    We will cover a lot of ground today. We begin with a new report from Goldman Sachs which argues that the US economy will remain the strongest in the world for many more years. The report rebuts claims that America is a nation in decline. This will be a very interesting discussion given that we have $16 trillion in national debt and exploding. Thank you President Obama!

    The upbeat Goldman report was delivered before last Wednesday’s surprising news that the US economy actually declined in the 4Q for the first time since 2Q 2009. While there are reasons to believe that the advance estimate of 4Q GDP (-0.1%) will be revised upward in subsequent reports, the surprise GDP report was not the only bad news in the last few weeks. We’ll take a look at the latest economic reports as we go along today.

    From there, we turn our eyes to the Fed. In December, there were rumors that some members of the Fed Open Market Committee (FOMC) were having doubts about the Fed buying a record $85 billion a month in Treasury bonds and mortgages indefinitely. Some even predicted that the FOMC might vote to end such purchases by the end of this year. Not so, as evidenced by the January Fed policy meeting. The Fed made it clear that the $85 billion in monthly purchases will continue indefinitely (unfortunately).

    Finally, we look at a new poll from Pew Research Center which found – for the first time ever – that a majority of Americans believe that the government is a threat to our personal rights and freedom! This is stunning! I will summarize this new poll which is loaded with eye-opening data.

    It should be an interesting letter. Let's get started.

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  • Shocking Fed Survey on Consumer Finances

    Today we focus on a new Fed study which found that Americans’ net worth plunged almost 39% in the period from 2007 to 2010. That period included the so-called Great Recession, a financial crisis and a severe bear market in stocks. There are lots of interesting statistics to look at in this new Fed study.

    I would be remiss not to comment on the results of the Greek elections on Sunday. As I suggested in my Blog on Friday, the mainstream New Democracy party prevailed and defeated the left-wing Syriza party that vowed to default on Greece’s debt and exit the euro. It remains to be seen what happens in Greece going forward, but hopefully it is off the front pages at least for a few weeks.

    The Fed Open Market Committee (FOMC) is in session as this is written. Rumors abounded last week that the Fed would vote to enact more “quantitative easing” at this meeting. I have also discussed that possibility in recent weeks. While we won’t know anything until tomorrow afternoon when we get the official policy statement, the markets are anticipating some new stimulus in one form or another. As for me, I’m not so sure.

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