Instead of taking its chance to continue normalizing monetary policy last week, the Fed didn’t do jack-squat. I say “continue” because they started to normalize policy when they stopped buying bonds back in October.
As of last week, the federal funds rate is still at 0%, and they’re keeping their balance sheet intact to reinvest maturing securities on their books. They didn’t do a damn thing to raise rates to a reasonable or normal level.
We all know why they haven’t. The economy is still too fragile and needs accommodative financial conditions.
But if our economy can’t handle a measly quarter point hike without a major calamity… they may have a point. Because frankly, it probably can’t.
The Fed needs news of a sound economy to raise rates. But they can’t find it here, and they can’t find it elsewhere. In the U.S., monthly reports depict an economy growing at a tepid rate, at best (and we know the bigger picture when it comes to the stock market and downward demographic trends). Meanwhile, Greece and Europe are in trouble, China’s stock market is in a major bubble and geopolitical troubles abound.
No one wants to stir the pot, because at this point, touching it might just cause it to bubble over.
And that’s all there is to it: The Fed doesn’t want to be blamed for a market collapse. Better for them, they don’t need to. They just have to wait and let one of the other many catalysts do the job for them.
They’re all talk and no action. For bond traders, that’s really okay. They’re the ones that have the ultimate say in where yields go, not the Fed. And they won’t be waiting on the Fed to act.
So in the meantime, economic data will continue to drive the markets, and speculation will continue as well. This is good news for those seeking continued volatility in the interest rate markets. That means Dent Digest Trader subscribers will have plenty of opportunities to profit from this volatility between now and the next Fed meeting.
Editor, Dent Digest Trader