Fed must now face the real threat: DEFLATION
By: Rick Ackerman, Rick’s Picks
GoldSeek.com
Monday, 21 September 2015
Yesterday, the Fed announced that they would not be raising rates in addition to once again downgrading their expectations for economic growth and inflation looking out over the next couple of years. The response in the stock market has been negative; and for bonds, particularly the closed end Municipal Bond Funds, extremely positive. That is probably not what most were expecting. It has been my contention that the Fed is unlikely to raise rates at all in this economic cycle that began in mid-2009, and my view appears to be supported by the current economic and market environment as well as the circumstances that Janet Yellen described as the reason for the Fed staying at 0% to 0.25% on overnight rates.
Rate-Hike Mantra
In Q1 (April 2015), a narrative began to emanate from Wall Street that first-quarter economic weakness was transitory and that after six years the economy was still poised to accelerate into a legitimate cyclical recovery as the year progressed. Probably by repeating the mantra enough times, it became conventional wisdom even in the face of predominantly contradictory economic developments, particularly low-inflation data. Even though the Fed became a source of extreme frustration by continuing to leave rates alone, the strength of the conviction only grew. The result was a significant back-up in interest rates. That has most likely come to an end, leaving the potential for a meaningful decline in rates and higher bond prices in coming months and quarters (see chart below).
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