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Actual Tightening? Yeah, Sure…

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Yellen's target audienceI tuned out the Fed’s annoying blather long ago rather than get sucked into remotely caring about something as stupid as quantitative easing. Over the years, I’ve posed the rhetorical question here many times: When will the Fed raise rates? My answer was always the same: “Never!” I batted 1.000 with this prediction for nearly a decade — until the Fed actually raised the federal funds rate by a token 25 basis points last December. Now they are talking about doing it again in June. Why am I having trouble believing them?

Yes, I understand that it’s all just a dog-and-pony show intended to fool us into thinking that it is inflation we should be worried about, not the deflationary black hole into which the global financial system, led by Japan and Europe, has been slipping. But does anyone actually believe that 25 more basis points, even if it happens, is going to tighten much of anything?  If so, they must be among the few Americans outside of the prison system who do not receive at least two or three teaser offers per week to borrow money on credit cards for 12 to 18 months at 3% or less.

Suppose It’s for Real?

As for yesterday’s announcement, traders are conditioned to act as though virtually everyone believes that actual tightening is coming, presumably just in time to nudge an already moribund U.S. economy into recession. The news sent stocks, bullion and Treasurys into a dive. But suppose stocks in particular continue to dive — not because of the Fed’s embarrassing attempt to walk the walk on interest rates, but because the economy is headed into the dumper?  We should know in a couple of months, if not sooner. In the meantime, it looks like a buying opportunity to me in gold, silver and long-term Treasurys, if most surely not in shares.

Please do not ask trading questions!

  • Bam_Man May 19, 2016, 12:25 pm

    Yup, I’m with you Rick.
    The zero-coupon Treasuries I own (and trade) are the “gift that keeps on giving”.
    Yesterday’s silly nose-dive was an excellent opportunity to buy back some of what I had sold during the April 26-May 13 rally.

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