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Motley Fools – The Fed Edition


The FOMC continues to point out that the Fed have no idea what to do.

Christopher-LemieuxSMBullion.Directory precious metals analysis 7 January, 2015
By Christopher Lemieux
Senior Analyst at Bullion.Directory; Senior FX and Commodities Analyst at FX Analytics

The Federal Reserve are a motley crew (minus Tommy Lee). And you would think for academics, they would have an idea of what they are doing. On second thought, that is the primary reason why they do not understand how to fix the mess they created. The dynamic world of financial markets and intertwined economies do not fall within a textbook. 

Today’s FOMC minutes report, once again, was good for quick gains in the equity market; but, it continues to show how the Fed is trapped. They are walking a very thin tightrope on leading market participants to the idea that the US economy is strengthening, but also the idea that they must be patient for a rate increase for one reason or another.

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Mrs. Yellen wants her cake and the ability to devour it too. Unfortunately, it does not work that way.

The FOMC minutes show faith that lower oil prices are a net-positive to GDP and employment (even as shale states are shedding jobs). The Federal Reserve sees deflationary pressures caused by the decline in oil as transitory. The only problem is that while the net-positives of lower oil are transitory – at best – the net-negatives are big.

WBH Energy is first US shale company to file for bankruptcy, today, and the highly levered sector will begin to see more casualties with prolonged declines in crude.

And about that whole “consumer spends more” idea?

According to Gallup (and many other polls), the effect of lower gas does not exactly mean the consumer becomes loose with their purse-strings. In December, the average consumer daily spending was $2 higher than last December when oil averaged $96 to $100 per barrel – nearly twice what it is now.

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They also see the economy moving at a moderate pace, as PMI data reaches multi-month lows; and most of the FOMC members saw no evidence of broad wage growth. However, this time there was focus on risks surrounding international turmoil, which the Fed admitted would effective the US economy.

So, they are positive the US economy but not so much on the effects slow global growth will have on it.

In conclusion, the FOMC minutes suggested that a Fed funds hike before April is unlikely. It’s a bit daft. As each passing month goes by, the Fed pushes the idea of a rate hike further way. It is quite possible the Fed is waiting for global contagion to take hold before saying there will be no rate hike.

The Fed has historically been behind the curve, and this time is no different. I would imagine the process to have been more smooth if a rate hike was initiated when economic data actually suggest the US could be expanding.

The dollar fell from session highs, and precious metals came off their lows following the statement.

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