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Fed Is Market Dependent


Scratch data dependent, the Fed is market dependent.

Christopher-LemieuxSMBullion.Directory precious metals analysis 8 April, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The Federal Reserve wants to paint this picture that the economy is improving, rate hikes are coming, and there are no indication of asset bubbles. It has been said so much to the extend that general consensus believes the empty rhetoric. Those that have said the Fed was market dependent, myself and other bigger fish with Fed contrariness, were looked over.

Former Goldman Sachs Chief Economist and Current New York Fed Bank President William Dudley has openly admitted a few things that contrarians have been saying for a while now. First, during an event held by Thompson Reuters, Dudley said, blatantly, that the 12 months of above-200,000 per month job growth was not indicative of a strong economy; and he stated that March’s meager 126,000 addition was a symptom of a frail economy.

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The New York Fed President said that both economy and labor market were weak. He favored on waiting for a rate hike due to these factors, as well as inflation has yet to maintain levels near the Fed’s two percent target. If memory serves me correctly, Fed Chair Janet Yellen said she would have no problem raising rates given current inflation levels.

He then admitted that Fed policy is dependent on market reaction. Dudley told the audience that if markets react too negatively, the Fed could slow tightening, which is suppose to be shallow whenever it does begin, or even stop tightening all together. It’s just not the equity bubble the Fed worries about, but the bond market has become grotesquely distorted as the Fed holds the largest fixed-income portfolio in the world.

Dudley did say that if the markets do not react at all, the Fed could speed up tightening; but, does anyone really think that will be the outcome? Just the mention of potential rate hikes sinks risk assets and stirs up volatility. Rate hikes on the backdrop of a cruddy economy will be no different.

After seven years of reckless policy fathered by Ben Bernanke, the economy and Main Street have gone nowhere. The markets are sudsy, and the Fed missed their chance to get off the lower bound. They have an empty toolbox. 

The mere fact that rates and the state of the economy are still debated after endless quantitative easing (ZIRP is still QE) is case and point that QE never and will never work.

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