The Fed Raises Interest Rates.
Quarter Point Rate Hike.
Why the Fed Raised Interest Rates.
A Rate Hike, Finally
As predicted, the Federal Reserve announced a quarter point rate hike today.
All year we have said all year, the Federal Reserve would raise rates by the end of the year, to stay ahead of the other central banks and to boost demand for U.S. Treasury bonds, which according to yesterday’s Treasury report is clearly in decline.
The Fed’s policy is focused primarily on protecting the United States’ most valuable asset – the dollar and its ability to get the world to buy treasuries so it can continue fund the massive welfare/warfare state.
Fed policy is NOT about protecting the too big to fail banks, the economy, the stock market or the job market – those are secondary objectives. The Fed’s primary objective is to protect the U.S. Treasury and its ability to sell U.S. Treasury Bonds.
De-dollarization is a nascent but real threat to dollar hegemony.
The Fed knows without strong demand for Treasuries, the Fed is done. A rate hike makes U.S. Treasury bonds attractive compared to other bonds, especially at a time when the Bank of Japan, the European Central Bank, the Bank of England and the Bank of Switzerland have lower and in some cases negative interest rates.
In addition, dollar demand is down because the price of oil is so low which means countries need fewer dollar reserves to buy oil.
What’s next for the Fed?
We believe the Fed will continue to push the concept that they are on a rate hike path (data dependent, of course) because the economy is improving and that “job gains” will eventually boost consumer spending and inflation. Having gained credibiity for raising rates, Ms. Yellen and Fed officials will talk about another rate hike for months sending conflicting signals that they might raise rates, might not raise rates or might lower rates.
The Fed won’t throw the towel in and reverse course until either the data clearly indicates a recession or another financial crisis occurs brought on by the bursting of the shale oil or sub prime auto bubbles.
Negative Interest Rates and QE4
Either a recession and/or another financial crisis are inevitable. This will lead the Fed to reverse course and, as we originally predicted when Janet Yellen was appointed to the Fed Chair position, to institute negative interest rates and eventually embark on QE 4.
The Fed is very clever. If the Fed had said at the beginning of the first QE program launched in 2009 that they would print over $4 trillion over the next seven years to buy U.S. Treasury bonds and worthless mortgage backed securities and that they would keep interest rates at zero, the dollar would have collapsed. That is exactly, however, what they did but the dollar did not collapse and indeed is higher today than it was before they started QE in 2009!
The Fed achieved this feat by talking about someday NOT doing what they did and the markets believed them.
Will they listen next time?
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