The Fed’s “Evolution” Has Put Them in a Precarious Position

lance_HSU.S. Treasury bonds yields were higher today amidst news that the economy grew by 2% in the third quarter.

Meanwhile, the stock market inched higher… but is down from last week after the Fed made its decision to raise the Fed Funds Rate.

It could be low oil prices – the lowest we’ve seen in years. Or it could be that investors aren’t convinced the market can actually handle higher interest rates.

The Fed has been fighting waning demographics and the “winter” economic season since bailing out financial institutions in 2008.

They’ve evolved from saving the world from temporary financial crisis… to virtually controlling financial markets today.

Demographics alone should have resulted in a natural pullback in stocks, deleveraging of debt, and other deflationary pressures.

But the Fed didn’t stop after it helped avert the initial financial calamity. It realized deflation was a major concern and started printing money to create inflation.

However, with the S&P 500 up nearly 200% since the bottom in 2009, it seems the Fed mixed up consumer price stability with stock prices.

That could be changing. The stock market is poised to close negative for the year. And last week, I noted for Treasury Profits Accelerator subscribers that the yield curve between short-term and long-term Treasurys appears to be flattening.

When that happens, bond investors believe there is less risk of inflation and overheating in the economy down the road. That means deflation is a likely course for the future.

Tomorrow, keep an eye out for the personal income and outlays report. This is the report the Fed looks at most closely, as it includes the Personal Consumption and Expenditures (PCE) index.

While last week’s Consumer Price Index (CPI) showed inflation of 2%, the Fed’s target, the PCE came in at 1.3% last month.

Treasury Profits Accelerator readers and I will pay close attention to this to see if my system triggers a new trade alert.

Lance Gaitan

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Categories: Central Banks

About Author

Lance Gaitan graduated from Franklin University in Columbus, OH with a degree in Finance. After graduating and working as an auditor for an insurance administrator as a number of years, he attained his securities license. He then went to work as a broker for a small firm and during the mid-1990’s Lance managed the futures trading desk for Piper Jaffray, a large regional brokerage firm based in Minneapolis. After migrating to Florida in early 2000, Lance founded a futures trading firm, GSV Futures, specializing in retail commodity trading strategies. Lance sold that business in 2006 and joined Harry Dent, Jr. and Rodney Johnson at Dent Research shortly thereafter.