Fed President Comments Send Stock Markets Diving for Cover

Last Friday the stock market tanked following another monetary policy maker’s statements about interest rates. It seems investors are, yet again, willing to believe the Fed intends to raise interest rates despite the reality of a bad economy. Policy makers continue to keep the idea of rate hikes alive despite the knowledge they are powerless to do anything.

In a speech Friday morning, Boston Fed President Eric Rosengren suggested the time for a rate hike was getting closer and delaying could dampen economic gains: “A reasonable case can be made for continuing to pursue a gradual normalization of monetary policy,” he stated. “Failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”

man with umbrellaThe Power of Suggestion

In response to Rosengren’s statement, the market sold off with utility and energy stocks receiving the worst hit. The Dow Jones fell 2.13% and the Nasdaq plunged 2.54%. Gold Stocks closed down almost 6% while bullion dropped around $10 and silver around $0.50.

According to the Washington Post, Rosengren’s statements seemed to catch investors off guard, probably given that Fed president is known to favor lower interest rates to spur economic recovery.

Rosengren’s new policy shift works on the assumption the economy has improved. But the facts say otherwise. The jobs report released early this month showed only 151,000 new jobs created and an unchanging unemployment rate of 4.9%. Some economists suggested the data “confirms that the economy is performing well.” Statements like this suggest we now work within a policy environment where no growth is a positive.

Bad Data Denial

However, the jobs numbers only worked to overshadow other bad data. Last week the ISM Manufacturing index number was released. The index monitors employment, production, inventories, new orders and supplier deliveries for more than 300 manufacturers and is usually a strong indicator of corporate profits. The index was at 49.4 with anything below 50 indicating a contraction and/or recession.

Data like the ISM get little attention because manufacturing in general isn’t a priority in our service economy anymore. However, lack of attention doesn’t mean lack of importance. Peter Schiff recently made the same point:

The fact that [manufacturing] is such a small part of the economy should be very concerning. Without manufacturing you really can’t have a service sector. The way the U.S. gets away with it is to just import what everyone else manufactures, and we run enormous trade deficits, which is an unsustainable model. It’s a great gravy train while the ride lasts, but when the rest of the world figures out that we can never pay back our debts, then the gravy train comes to an end.”

Up next was the ISM Non-Manufacturing number, which also came in under expectations. Economists were expecting a 55, but the number came in at 51.4, the lowest in 6 years.

The Fed Bluff

With all of this bad economic news, it’s a surprise all the Fed talk about raising rates is given any credence by the markets. Yellen and the FMOC claim to be “data dependent,” but they’re clearly not if they’re basing their decisions on some data while ignoring others.

The reality is the Fed needs to pretend the economy is getting stronger even while it’s not. Admitting it can’t raise rates means admitting there’s a recession, which it can’t do because that would cause the markets to tank and the Fed to lose what credibility it has. Politically, the Fed also knows it can’t admit the economy is circling the drain because it would all but help get Trump elected.

Instead, Yellen and her ilk have to keep the possibility of a rate hike alive at all times. But it’s a bluff, and the Fed is masterful at playing the game. Peter explains the almost predictable succession of events:

When the Fed starts to prepare the market for a rate hike, then the markets tanks. And now the Fed can’t hike rates. I guarantee you if the market really tanks and we’re down 10%, what is the Fed going to start talking about? QE4. They’re going to start talking about how monetary conditions have now tightened…the case for raising rates has now weakened. That’s what they’re going to say. It’s the same old thing all over again. When are people going to figure out the Fed can’t raise rates?”

Another key Fed official, Gov. Lael Brainard, is planning to speak today. Her remarks are likely to continue hinting at the timing for a possible rate hike and with more consequences for the markets.

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Peter Schiff

Mr. Schiff began his investment career as a financial consultant with Shearson Lehman Brothers, after having earned a degree in finance and accounting from U.C. Berkeley in 1987. A financial professional for more than twenty years, he joined Euro Pacific in 1996 and served as its President until December 2010, when he became CEO. An expert on money, economic theory, and international investing, he is a highly sought after speaker at conferences and symposia around the world. He served as an economic advisor to the 2008 Ron Paul presidential campaign and ran unsuccessfully for the U.S. Senate in Connecticut in 2010.