The Fed’s Open Conspiracy

For such a clammed-up bunch the Fed’s been awfully gossipy lately…

They’re practically hollering a March 15 rate hike. Coincidence? It seems more like an open-air conspiracy…

But will a March rate hike start the Fed on a destructive cycle? There’s evidence for it, as you’ll see shortly. But first that open conspiracy…

Janet Yellen addressed a group in Chicago today. From which:

Given how close we are to meeting our statutory goals… we currently judge that it will be appropriate to gradually increase the federal funds rate if the economic data continue to come in about as we expect… in which case a further adjustment of the federal funds rate would likely be appropriate.

She might as well have announced a hike today. More:

San Francisco Fed head John Williams bleats a rate hike is “very much on the table for serious consideration.”

New York Fed chief William Dudley — Yellen proxy and maybe the most influential of her goons — belches that “The case for monetary policy tightening has become a lot more compelling.”

James Bullard, CO of the Fed’s St. Louis wing, gloats the Fed “has essentially achieved its dual mandate” of maximum employment and price stability.

Even Fed Gov. Lael Brainard — the Fed’s most dovish dove — is chirping it’s time to start tightening the belt.

Unless the market goes to seed or the economy blows up within a fortnight, the Fed’s backed itself into a corner. No hike and it risks its remaining atom of credibility. And a March hike will likely increase expectations for more. Michael Feroli, chief U.S. economist at J.P. Morgan:

Of course, the Fed hiking in March will increase expectations that the Fed will deliver quarterly rate hikes.

But we wonder if the Fed’s reading its own press…

The Atlanta Fed’s estimate for first-quarter GDP rings in at a sluggish 1.8%. They had to adjust it down from a previous 2.5% — not quite a rounding error. That’s after they already walked it back from 2.7% to 2.2% last month.

How long before they get to zero?

If you’ve been following Jim Rickards, you know a busted cuckoo’s got it all over the Fed:

Their forecasts have been consistently wrong by orders of magnitude for years. Actual data show unemployment higher, growth lower and inflation lower than the Fed expects.

Maybe the economy’s not as bouncy as they think.

And consider… According to research by Bank of America, history shows that once the Fed starts tightening, it keeps tightening until there’s a “financial event.”

It adds: “This acceleration of U.S. financial tightening is a huge deal, and could in time become hugely negative.”

Their chart reveals that for eight of the 12 financial “events” circled, eight struck after tightening:

The study adds that the next “event” — which it predicts for the second half of the year — will occur at a much lower level of interest rate than the past. That’s because the base line is lower than at any other point in history, as the chart shows.

Bank of America draws this sketch of the year ahead:

If the Fed raises this month and the market continues under full steam, the remaining bears will hoist the white flag. They’ll pile into riskier equities. That’ll lead to a “melt up” in stocks. And they could “melt up” until summer.

Bank of America’s “Bull & Bear Indicator” is flashing seven out of 10 today. Bullish… but not reckless. But after the great melt up, they think it’ll cross the red line — eight:

At some stage in coming months, our Bull & Bear Indicator will likely exceed the “greed” threshold of eight.

Exhibit B:

And once investors make it over the “wall of worry” and past the greed threshold, down comes Humpty Dumpty:

Like Humpty Dumpty, risk assets will invariably have a great fall once the ‘wall of worry’ is climbed and investors stop worrying.

It’s the classic Warren Buffett saw about being greedy while others are fearful and fearful when they’re greedy.

If the Fed hikes this month and markets don’t blink, investors could climb that wall of worry. That’ll give the Fed ammo for more hikes. Then that “financial event” Bank of America projects enters the stage?

BofA’s bottom-line advice: “We recommend buying S&P 500 puts for the second half of 2017.”

If their analysis is right… now might be the time to take it…


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning