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The Only Game In Town

05/19/2016

Starting at 1400 hours or 2 PM yesterday, I’m sure the traders on the floor of the New York Stock Exchange were calling for motion-sickness bags, as the 200-point roller-coaster ride began.

That’s when the Fed released their minutes from the last meeting of the FOMC or Federal Open Market Committee, which decides on changes in interest rates.  Those minutes said they were serious about raising rates next month.  Of course, the stock market did what it does best – it overreacted!

You’ll recall the Fed finally raised interest rates by a quarter-point last December, for the first time in nine years.  They also said they expected to raise rates four times in 2016.  At the time, I wrote they might raise rates once, maybe twice, but certainly not four times.  As much as I hate to agree with Goldman Sachs, the Fed will NOT raise rates next month.  Would you raise rates without knowing Q2 GDP growth nor the BREXIT vote?  Not a chance!

Their intentions are good.  They want to normalize interest rates as the U.S. economy stabilizes, following the Great Recession.  Increasing interest rates in the U.S. by a whopping one percent should not be a big deal, but the Fed has become the de facto central bank of the world.  Because the U.S. is once again the economic engine of the world, any increase in interest rates in the U.S. will impact the whole planet.  To be clear, slowing down the U.S. economy will slow down the whole world, and that is why the head of the International Monetary Fund has pleaded with Fed Head Yellen not to raise rates.

Under the old economic order (everything prior to 2008), the stock market watched Fed actions carefully and overreacted only slightly.  In those days, the market had the opportunity to overreact to fiscal policy (by Congress) as well as monetary policy (by the Fed).  With monetary policy the only game left in town, the stock market’s overreaction to monetary policy is here to stay, unfortunately.

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