June 15, 2016, 4:30pm EST

The Fed held rates steady today.  As we’ve talked about, this was a decision they laid the ground work for over the past two weeks.  We want to talk about a few takeaways from the Fed event, and then continue our discussion from yesterday on the Bank of Japan decision tonight (where the big news may come).

First, the Fed did indeed consider the global stability risk that comes with the decision in the UK on whether or not to leave the European Union.  The polls in recent weeks have continued to show that it could go either way.  Meanwhile, the bookmakers have had this vote clearly in favor of “staying” in the European Union all along — as much as 70/30 ‘stay’ much of the way.  But those odds have been narrowing in the past week.

Still, as we discussed yesterday, holding pat on rates today was a “no risk” decision, especially because they had an event (the weak jobs data) and the platform (through a prepared speech by Yellen just days after the weak jobs data) to manage away expectations for a hike.

With that, stocks remained steady on the decision.  And markets in general remained tame.

So now the Fed is in position to see the outcome in the UK.  There was some two way talk about the jobs and inflation data, but it looks like the Fed is most concerned with what’s going on in the global economy.  That’s clear in their reaction to the oil price bust, when they responded back in March by taking two rate hike projections off the table.  And it’s clear in their reaction now to the Brexit risk.

But their new projections on the future path of interest rates have been ratcheted down in the coming years, and in the long run.  For perspective, a year ago the Fed thought the benchmark rate would be 2.75%.  Now they think it will be 1.5.  Why?  What’s been acknowledged more and more in recent meetings is the impact of the weakness and threats in global economies on the U.S. economic outlook.  The U.S. economy has been relied upon to drive global economic recovery, but it’s being dragged down now by the weight of global economic weakness.

This all puts pressure on Europe and Japan to follow through on their promise to do “whatever it takes” to restore their economies.
As we’ve said, the most important spots in the world, right now, are Japan and Europe.  The Fed only began its campaign of removing its emergency level policies because Europe and Japan took the QE baton handoff from the Fed – picking up where the Fed left off.  And unlike the U.S., which is constrained by “flight to safety” global capital flows and a world reserve currency, they have the ingredients (primarily Japan) to make QE work, to promote demand, to promote growth.  Japan has the largest government debt problem in the world. They have an undervalued currency.  They have a stagnating economy with big demographic challenges. They have are in a deflationary vortex.

They have the perfect attributes for a mass scale currency printing campaign. Not only can it work for their domestic economies, but it serves as the liquidity engine and stability preserver for the global economy.

In normal times, the rest of the world wouldn’t stand for a country outright devaluing their way to prosperity.  But in a world where every country is in economic malaise, everyone can benefit – everyone needs it to work. It can be the solution for returning the global economy to sustainable growth.

With that, and given the position of the yen and Japanese stocks (see our chart yesterday), along with the underperforming economy in Japan, even after three years of QE, now is the time to throw the kitchen sink at it (i.e. they should act tonight, and in a ‘shock and awe’ fashion).

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