Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24
US House Prices Trend Forecast 2024 to 2026 - 11th Oct 24
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Fed Changes the Rules to Maintain ZIRP

Interest-Rates / US Interest Rates Mar 20, 2014 - 02:48 PM GMT

By: Michael_Pento

Interest-Rates

The New Chairperson of the Federal Reserve showed off her dovish feathers after the latest meeting of the FOMC. Ms. Yellen abrogated the threshold of 6.5% on the unemployment rate as the starting point for short term rate hikes and replaced it with amorphous and ambiguous language that allows plenty of wiggle room with rates.

Just like a child sometimes changes the rules of a game in mid-stream in order to guarantee a favorable outcome, the Fed has ripped up the rulebook to suit its own needs.



The Fed was fully aware when it first stipulated its guidelines for starting rate hikes, that a 6.5% unemployment rate threshold could be breached with the help of a contraction in the labor force participation rate and not fully through increased hiring. However, it still drew a line in the sand in which investors were forced to determine when the cost of borrowing money would begin to be increased directly by the central bank.

To the central bank's credit it did follow through on the promised continued reduction of asset purchases by $10 billion per month. The Fed is now purchasing $30 billion in Treasuries and $25 billion worth of MBS. This reduction was already in the cards and didn't surprise anyone. Nevertheless, the Fed completely abolished a numerical threshold for the unemployment rate to fall below before it begins to raise the Fed Funds Rate. The reason for this is clear; the Fed realizes it cannot raise short-term rates without pricking the asset bubbles it has worked so hard at creating and sending the economy into a deflationary tailspin.

The condition of the U.S. economy (and indeed global GDP as a whole) is so anemic that even after 5+ years of massive Federal Reserve market manipulations, the Fed cannot raise short-term interest rates. In other words, they will keep making excuses as to why they can't raise interest rates and continue to move the goal posts for their convenience.

The Fed is in the process of trying to end QE, but the stock market and Fed don't yet realize that the tapering of asset purchases is tightening monetary policy. This will cause long-term interest rates to rise-and the worst is still to come. For instance, the 10-Year jumped to 2.77%, from 2.68% on the same day of FOMC's decision to reduce asset purchases by another $10 billion. And short-term rates are rising to an even greater extent, despite the fact that the Fed is still posting a bid of $55 billion each month for these debt instruments.

The Federal Reserve's quantitative easing program was the only reason why the 10-Year Note, and longer-term interest rates in general, are as low as they are today. Ending QE will cause a huge spike at the long-end of the yield curve unless the economy is sharply contracting. Whether or not the Fed admits this is irrelevant.

The fact is the Fed is going from buying all of the newly issued Treasury debt, to zero of the newly issued debt market. And there isn't any entity that I am aware of in the entire world that will supplant the Fed's purchases at anywhere near today's rates. So interest rates are going to rise, and that is deflationary and also bullish for the U.S. dollar in the short-term.

But the anemic economic data should continue to worsen as interest rates rise. This means that the Fed will stop tapering sometime in the very near future -- probably in the summer or early fall -- and then they will feel compelled to launch QE V. When this shift in policy takes place it will be incredibly significant for world markets--beyond anything we have seen before.

In the interim, investors that have bet on an easy escape from QE will find out how wrong they have been. The equity market should undergo a severe correction once it becomes clear that asset prices and the economy have been highly reliant on debt monetization from the Fed.

The gold market has priced in a worst case scenario for the yellow metal--a balanced budget and no growth in the money supply. That's clearly not going to happen. In fact, the opposite is much more likely to occur. However, as I've stated many times before, the major move higher in precious metals won't occur until the overwhelmingly-accepted notion regarding the Fed's ability to end QE and raise interest rates with full impunity is proven to be fantasy.

Therefore, a significant spike in hard asset values will occur when the Fed acknowledges the fact that there is no easy escape from QE and the economy is destined to head into a deflationary collapse without the Fed's continuous support of bond prices. Although that would be healthy for the economy in the long term, it isn't going to happen voluntarily because of the hubris of politicians and their constituents. The Fed will stop tapering and undergo a massive and extended QE program in the latter part of 2014. That is when investors need to go all-in on inflation hedged securities. Until then, it is prudent to hold an abnormally high level of cash in your portfolio to be able to take advantage of the coming selloff.

Michael Pento is the President and Founder of Pento Portfolio Strategies and Author of the book “The Coming Bond Market Collapse.”

Respectfully,

Michael Pento
President
Pento Portfolio Strategies
www.pentoport.com
mpento@pentoport.com

Twitter@ michaelpento1
(O) 732-203-1333
(M) 732- 213-1295

Michael Pento is the President and Founder of Pento Portfolio Strategies (PPS). PPS is a Registered Investment Advisory Firm that provides money management services and research for individual and institutional clients.

Michael is a well-established specialist in markets and economics and a regular guest on CNBC, CNN, Bloomberg, FOX Business News and other international media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post.
               
Prior to starting PPS, Michael served as a senior economist and vice president of the managed products division of Euro Pacific Capital. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. 
       
Additionally, Michael has worked at an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street.  Earlier in his career he spent two years on the floor of the New York Stock Exchange.  He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Michael Pento graduated from Rowan University in 1991.
       

© 2014 Copyright Michael Pento - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Michael Pento Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in