The Fed Is No Longer The Only Game In Town


January 31, 2017, 4:00pm EST                                                                                         Invest Alongside Billionaires For $297/Qtr

We have some key central bank meetings this week.

Remember, it wasn’t too long ago that the world was sitting on every word uttered by a central banker.  Those days are likely over — at least to the extreme extent of the past decade.  For now, Trump has supplanted central bankers as the most powerful policy maker in the world.

Still, the Fed will meet following their rate hike last month, the second in their very slow hiking cycle – 1/4 point hike twelve months apart.  They’ll do nothing this week, but the data tends to be going as desired by the Fed, and other major central banks for that matter (aside from Japan) — meaning, inflation has recovered and is nearing the target zone.

Remember, this time last year, the world was staring down the barrel of DE-flation again.  Inflation, central bankers have tools to combat.  Deflation is far more difficult, and far less predictable.  It can spiral and grind economies to a halt. When consumers are convinced prices will be cheaper in the future, they wait.  When they wait, economic activity stalls.  With that, deflation tends to create more deflation.  The fear of that scenario, and the potential of an irreversible spiral, is why central bankers were cutting rates to negative territory last year.

Where was the imminent deflationary threat coming from?  Slow economic activity, but mostly a crash in oil prices.

Central bankers have the tendency to change the rules of the game when it suits them.  When inflation is running hot, they may hold off on tightening money by pointing to hot “food and energy” prices. These are temporary influences, as they say.  Interestingly, they are much more aggressive, though, when oil prices are creating a deflationary threat – as they did last year.

With that, oil prices have doubled from the lows of last February.  So it shouldn’t be too surprising that inflation numbers are rising, and getting close to the desired targets (around 2%) of the central bankers of the U.S., Europe and England.

So will we see a turning point for global central banks (not just the Fed) in the months ahead?  The world has already been pricing in the likelihood that the pro-growth policies coming from the Trump administration will take the burden of manufacturing economic recovery off of the central banks.

But we may find that “transitory oil prices” will be the excuse for more inaction by the Fed, and continued QE from the ECB and BOE in the months ahead, which may result in a slower pace of rate hikes than both the Fed projected in December and the market has been anticipating.

Higher rates at this stage: 1) creates problems for the housing recovery, 2) promotes more capital flight from emerging markets like China (which means more dollar strength),and 3) threatens to neutralize the fiscal stimulus and reform coming down the pike for the U.S.

In December, the Fed dialed back their talk about letting the economy run hot (i.e. staying well behind the curve on inflation to make sure recovery is robust).   We’ll see if they switch gears again and start explaining away the inflation numbers to oil prices.

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