As talk of the Federal Reserve raising its benchmark interest rate at its June or July meeting intensifies and financial markets move in anticipation what, if anything, are the pundits missing?
There is widespread concern in Asia (especially China) and in Europe about the anemic pace of regional and global economic growth. Both the IMF and the World Bank have been nudging their GDP forecasts lower for months. In response, many central banks are looking for ways to inject more monetary stimulus and push interest rates toward zero or further into negative territory.
In contrast, some Fed policymakers seem to be looking to provide less stimulus, arguing that the headwinds restraining U.S. growth are easing. An increase in the federal funds rate and ongoing strong demand for Treasuries by foreign buyers would in all likelihood result in a resumption of upward pressure on the dollar. But is it really possible?
Markets arent prepared for a hawkish Fed: The Lindsey Groups chief market analyst, Peter Boockvar, doesnt think so. Were seven years into a bull market that has been elevated by Fed easing, so you take that away, and I dont think thats something the markets ever prepared for, he told CNBC on May 23.
Economic fundamentals dont support any sort of aggressive Fed action. I dont think the Feds going to be able to get away with a multitude of rate hikes other than maybe just one more, Boockvar added. Look at the context that theyre raising in: The economys now growing less than 2%, earnings are now declining, profit margins are now rolling over, manufacturing is flatlining, and markets are very expensive. And to raise rates in that context, I dont think theyre going to be able to get away with much more.
Significant events on the 2016 calendar also weigh against Fed rate-hike odds. The June 23 Brexit referendum in the United Kingdom, in which voters decide whether to leave the European Union, occurs just a few days after the Fed meets, and the central bank likely will be loathe to act before that major international event is resolved. The November presidential election in the U.S. also could keep the Fed on hold, lest it be accused of unduly influencing the outcome.
Overdue for recession, and Yellens out of ammo: However, some Fed watchers think the central bank might actually deliver one more rate hike this year, because it sees the writing on the wall: Another recession is looming. Therefore, Chairwoman Janet Yellen has to raise rates now in order to cut them later when the slowdown becomes undeniable. With the federal funds rate now between .25% and .50%, the Fed has no ammunition left to stimulate the economy in a pronounced downturn.
And that downturn is long overdue, as the economic expansion following the 2008-09 financial crisis is now the fourth-longest on record, at 83 months. If the next president is not going to have a recession, it will be a U.S. record, Conference Board economist Gad Levanon noted. The longest expansion we ever had was 10 years, starting in 1991.
In recent weeks plenty of respected number crunchers from former Treasury Secretary Larry Summers and Carlyle Group co-founder David Rubenstein to JPMorgan Chase economist Michael Feroli and former Reagan-era budget chef David Stockman have warned that the next president almost inevitably will face recession, no matter who is elected.
Unrealistic to expect major tightening: If we accept the notions that the U.S. is overdue for a recession and that any sane central bank does not raise rates heading into a slowdown, then we have to believe in gold. In order to be bearish on gold, you have to believe that the Fed is going to embark on 100 to 200 basis points of hikes over the next couple of years, which I think is completely unrealistic, Boockvar said in a May 24 appearance on CNBCs Futures Now. This is an ideal opportunity for those who have not gotten in.
Boockvar thinks gold ultimately will take out the nominal record high above $1,900 that was set in September 2011. This is just the beginning of a new bull market in the metals, Boockvar predicted.
Rising rates very bearish for stocks: Even if the Fed does hike one or more times, Boockvar and other analysts dispute the conventional wisdom that says the dollar will automatically strengthen to golds detriment. History is rife with periods, from the 1970s bull market in gold to the mid-2000s, when the Fed lifted rates and the precious metal rose anyway.
How can gold rise during rising rates? As Adam Hamilton has so eloquently stated: Rising and higher interest rates are actually bullish for gold for one simple reason. And that is they are actually very bearish for stocks and bonds. Where have we seen this movie before? At the beginning of 2016, when U.S. stock markets cratered in the wake of the Feds first interest-rate hike in almost a decade, in December 2015.
Stocks have recovered somewhat since then, but thats because the Feds been quiet. Prepare now for the potential of renewed volatility in the stock market as the June and July Fed meetings near, whether or not the Fed moves. The growing likelihood of another rate hike should be a glaring technical sign to any tape-watcher, Boockvar said. I dont believe the dollar breaks out higher on another rate hike, and I therefore remain bullish on gold and silver and other commodities.
It is difficult to see how risks would narrow in the face of growing divergences, actual and anticipated.