FOMC Announcement Pushed US Dollar Down Big Time

The dollar did a big drop today after the FOMC announcement left rates unchanged. The Federal Reserve said the reduction of the balance sheet will begin relatively soon. I think relatively soon means September 2017.

The Fed seemed to indicate that “gradual” policy tightening will continue.

The Federal Reserve will begin winding down the stimulus program it embarked on to save the economy from the financial crisis. As expected, the Fed unanimously declined to raise interest rates.

The Fed predicts inflation will stabilize around the Committee’s 2% objective over the medium term despite inflation being below 2% in the near term. The Fed said they continue to expect “gradual increases in the federal funds rate”.

Fed Announcement Pushed Down the US Dollar

What the drop in the US dollar is telling us is that the Federal Reserve is dragging its feet. Just a few months ago, the Fed suggested we would get a rate increase in September. Instead, the Fed has backed off of that and now is toying with the balance sheet. The Fed seems to be telegraphing that it wants to slow down on tightening if inflation and wages don’t play out the way that they expect. I think the low inflation rate and low wage growth is really bugging the Fed because inflation should not be this low, at this time, in the economic cycle. Without a threat of runaway inflation, I think the Fed now feels that there’s no reason to rush another rate hike. This is all dovish which explains why the US dollar took a big dump today.

The FOMC announcement suggests they will begin quantitative tightening (QT) in September as they begin rolling off the $4.5 trillion portfolio of bonds it has accrued on its balance sheet, largely in the years after the crisis and the Great Recession. Balance sheet reduction is really the new QT as explained here.

The committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the market evolves as expected.

The Fed also offered a bit more information on the balance sheet reduction strategy. Having ballooned to $4.5 trillion thanks to QE, the Federal Reserve has already announced a strategy of gradually limiting the reinvestment of proceeds of maturing assets. The question has been the timing. This statement suggests it will begin “relatively soon”, whereas previously they had merely stated it will start this year. I think traders are pricing in a balance sheet reduction to start either in September or October. Efforts will entail allowing a restricted level of proceeds from the bond portfolio to run off. The program will begin at $10 billion per month and increase to $50 billion. Fed officials estimate that once the program has run its course, the balance sheet will probably still exceed $2 trillion.

Chair Janet Yellen and many others have suggested that the balance sheet runoff should not be disruptive to markets, though it’s possible that QT may push up rates if demand for the bonds the Fed is rolling off are not absorbed by private markets and central banks in other countries. However, we do not see any sign of that happening yet.

Janet Yellen really tried to downplay the planned balance sheet reduction last month.

The other big focus in Wednesday’s FOMC announcement was the Fed’s perspective on inflation. The core personal consumption expenditures index has dropped away from the central bank’s target for the last four months. The softer inflation figures together with the probability of a September balance sheet reduction means that December is likely the next month the Fed will consider hiking rates.

General inflation, excluding energy and food prices, has declined and is running under 2%.

Fed Board Chair Janet Yellen told Congress that temporary variables like prescription drugs and cheaper cellphone programs were behind the inflation downturn.

Markets didn’t expect the Fed to increase rates at this meeting. Dealers from the fed funds futures market are assigning about a 50-50 chance the central bank does one more rate hike before the year’s end.

In assessing the economy, the FOMC announcement showed that the committee held to its assessment that action was rising moderately so far this year. On inflation, the statement removed the word “somewhat” from June’s verbiage and said simply that inflation was running “under two percent,” a subtle tweak which nonetheless probably signifies officials are somewhat more cynical about reaching their mandated objectives.

Average hourly wage growth was stuck around 2.5 percent. Other inflation measures are even lower, with the Fed’s preferred estimate, the personal consumption expenditures index, at 1.4 percent.

Looking further ahead, we are still on with the prediction for two rate increases in 2018, anticipating reasonable 2-2.5% GDP growth over the next year and a likelihood that inflation will slowly return to target, helped by a tight labor market and the possibility of a gradual uptick in wage growth.

If you have any thoughts on the FOMC announcement feel free to comment below.

Here is the full FOMC announcement.

FOMC Announcement

Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace, and labor market conditions will strengthen somewhat further. Inflation on a 12-month basis is expected to remain somewhat below 2 percent in the near term but to stabilize around the Committee’s 2 percent objective over the medium term. Near-term risks to the economic outlook appear roughly balanced, but the Committee is monitoring inflation developments closely.

In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee will carefully monitor actual and expected inflation developments relative to its symmetric inflation goal. The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.

For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

Yellen Bitcoin Trolled In Testimony Before Congress

Yellen got bitcoin trolled in her testimony before Congress. A man held up a “Buy Bitcoin” sign in back of Yellen as she was speaking.

The unidentified bitcoin troll, whose stunt was visible on television, was removed from the hearing room. Holding up a sign violates the House committee’s rules.

I created the bitcoin meme above to go into the memes section here.

Janet Yellen Testimony Economy Strong Enough For Rate Hikes

The US economy is healthy enough to absorb gradual rate increases and the reduction of the Federal Reserve’s balance sheet, Fed Chair Janet Yellen testimony before Congress on July 12, 2017.

Federal Reserve Chair Janet Yellen told Congress on Wednesday that the bank hopes to keep raising a key interest rate and also intends to begin this year, the reduction of its bond holdings.

Yellen took note of several factors, such as household wealth and job gains that she said should fuel growth.

In what could be one of her last appearances on Capitol Hill, Yellen portrayed a market that, while growing gradually, continued to add jobs, gained from continuous household consumption and a recent leap in business investment, and was currently being supported too by stronger economic conditions overseas.

She blamed the economic slowdown in the first half of 2017 on inflation. She said Fed officials are watching developments closely to be certain price gains go back toward the 2 percent inflation target of the Fed.

Janet Yellen Testimony Freak Out Over Inflation

Janet Yellen seemed a little freaked out over the big drop in inflation over the last few months.

I take Yellen’s comments on inflation to mean that the economy should not have the CPI plunging in this part of the economic cycle. In fact, just the opposite should be occurring. But she added that it was considered by officials as an anomaly; inflation is predicted by the Fed next year.

Many economists believe the Fed, which has raised rates three times, will increase rates yet another time this year.

The Fed continues to anticipate that the development of the market economy will justify gradual increases in the federal funds rate over time while reductions in the Fed’s holdings of more than $4 trillion in securities will probably start “this year”.

In her prepared testimony before the House Financial Services Committee, Janet Yellen testimony repeated the message she’s been sending: the market has improved enough that it no longer requires the support the central bank began providing in 2008 in the aftermath of a serious financial crisis and the deepest recession since the 1930s.

In light of the continuing expansion, the Fed plans to keep raising its benchmark rate of interest and to lower its investment holdings, Ms. Yellen said in prepared testimony. She did not offer details concerning the time of the next actions of the Fed. Analysts expect the Fed to begin shaving its bond portfolio before the end of 2017.

The economy began the year with a slow growth rate of just 1.4 percent, it has regained momentum in recent months, aided by strong job gains, a revival of business investment and a strengthening of international markets.

Bottom line: the market is at full employment and the Fed is moving rates. As the Fed reinvests some of the bond holdings which mature monthly, they will decrease that reinvestment to reduce their balance sheet which will mark the beginning of QT (quantitative tightening). Many believe that QT began this year when the Fed did a series of rate hikes.

The Fed needs to keep policy accommodative to keep on supporting the recovery, but may hit a “neutral” rate quicker than anticipated. Estimates are that inflation has been dropping so fast that we could be near zero right now. Yellen has said the Fed expects estimates of the inflation rate to grow over time.

Yellen said in her testimony that as it stands rates “might not need to rise all that much farther” to reach neutral.

Yellen said growth remains moderate with business investment and consumer spending picking up, and the US economy is benefiting from growth in other countries too.

A strengthening in economic development abroad has provided significant support for U.S. manufacturing production and exports, Yellen said.

The Fed slashed its key policy rate to near zero to fight the worst economic recession since the 1930s, and kept it there for seven years before nudging it higher in December 2015. It left the rate unchanged before increasing it again in December 2016, March 2017, and June 2017 of this year.

At its June meeting, the Fed indicated that it expected to start decreasing its $4.5 trillion balance sheet after this year, a measure that could put slow upward pressure on longer-term prices for such things as home mortgages.

Yellen said, the market seemed to be in a virtuous loop of hiring, investment and spending which should increase resource usage somewhat further, thereby fostering a quicker rate of wage growth and price increases.

The Janet Yellen testimony was fairly uneventful except for her comments on falling inflation which seemed to baffle the Fed as to why this was happening at this point during the economic cycle.

One Does Not Reduce $4.5T Fed Balance Sheet in Background, Like Paint Drying

One does not simply reduce a $4.5 trillion Fed balance sheet in the background, you know, like watching paint dry. Janet Yellen a.k.a Lady Strange, did not disappoint with her carefully crafted words so as not to pop the stock market bubble.

Fed Balance Sheet Reduction Plan

The Fed plans to reduce reinvestments in Treasuries and MBS’ by $10 billion a month. Every 3 months they will raise the amount until it gets to $50 billion a month.

In the video below, I talk more about the Fed balance sheet reduction plan and then we look at the how the major indices responded today to the news.

How Not Following the Consumer Price Index Makes You a Rookie

Something important happened on the Consumer Price Index today and if you’re not following it, you’re a rookie. Don’t be a rookie. Listen to what the CPI is saying.

Consumer Price Index Is Saying Fed Should Not Raise Rates

A common theme that you will continue to hear me drive home is that the economy is too weak for the Federal Reserve to hike rates. Today, the CPI confirms that IMO.

The CPI missed. The CPI forecast was for no change at 0%, the actual number was -0.1%. That is a big miss for this indicator folks.

Don’t be that rookie that follows the Fed press conferences after rate hikes where Yellen says the economy is growing at a moderate pace and everything is fine. Everything is not fine and I think the CPI release today confirms that.

Maneco64 posted this video on YouTube today about the Consumer Price Index and I think he nails the analysis.

Why Current Interest Rates Could Help Get Yellen Fired

President Trump told Janet Yellen he thinks she’s a low interest rate person like himself according to a CNBC report (link above). Yellen has been raising current interest rates and so I’m thinking the President is less likely to keep her on-board when her term expires in February 2018.

Citing a Wall Street Journal article, President Trump told Janet Yellen back in January that she was doing a good job, according to people familiar with the exchange. However, the President also told Yellen that he thinks she’s a low interest rate person like himself.

Deviate From Low Current Interest Rates Else You’re Fired

I’m thinking that President Trump asked his legal advisor if he has the power to flat out order Yellen to keep interest rates low. I know I’m reading tea-leaves regarding current interest rates but it’s important we get the conversation going as the Fed is the single most important factor in the direction of the stock market.

President Trump was probably told that he can’t directly order the democrat Yellen to keep rates low but that he could make it clear to her that he favors lower rates. I think this was a clever way of communicating to Yellen what he wants her to do if he’s going to keep her on after February 2018.

Yellen has been raising current interest rates and slowing down the economy. If the US economy keeps deteriorating in the second half of 2017, you can bet that the President fires her when her term expires in February 2018. Again, I’m reading tea-leaves here so take this speculation with a grain of salt.

Stock Market Crash 2017 Brewing

stock-market-videos 4Fe3kX - Stock Market Crash 2017 BrewingBefore you dismiss this as just another gold/silver bug predicting gloom and doom so that they can profit, consider Caterpillar’s recent announcement that they are closing their Chicago plant and cutting 800 jobs along with it.

Caterpillar make’s large construction equipment and they’ve been struggling for a few years now. How can the companies that produce construction machines be going out of business when according to Janet Yellen the economy is getting stronger? Silver Report did a show discussing Caterpillar and the disconnect between soft data and hard data and makes some excellent points IMO.

Indicators of Stock Market Crash Brewing! Silver Price Economic Collapse 2017. Caterpillar Layoffs

Saturday Night Show: Janet Yellen Rate Hike While Pension Plans Going Broke

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A weekly Saturday financial show that attempts to predict market direction for the week ahead by looking at a variety of fundamental and technical charts. This week’s show features commentary on Janet Yellen and the Federal Reserve’s strange timing of a rate hike, how Obama Administration diverted FNMA money and investors dividends into Affordable Care Act to keep it solvent, and the collapsing pension funds across America.

Here Comes Inflation FINALLY! Traders Focus On Earnings

We have enough data to say that inflation is finally trending higher.

In case you are wondering why inflation moving higher is important, please review this.

The less volatile sticky CPI confirms the uptrend.

ObamaCare has exploded the cost of medical care higher.

Medical care commodities, which are prescription and non-prescription medications, have exploded higher.

Inflation is finally trending higher which is what the Federal Reserve has been trying to engineer for years through monetary policy. The WSJ writes

Fed Chairwoman Janet Yellen herself said last week that letting the economy run hot for a while might have some benefits… None of this is enough to take a rate increase at the Fed’s December meeting off the table. But it does mean that, even as prices pick up, further rate increases will be slow to come. Investors accustomed to inflation running below the Fed’s target may be in for some retraining.

Folks, this is another reason why we need to start getting more bullish on the stock market as we head into November and the start of the best six months of the year. Remember, a big part of the bearish scenario was a slowing US economy pressured downward by deflation as a result of Saudi Arabia destroying our shale oil industry. Lots of good jobs were lost and replaced by lower paying service sector ones as a massive wave of disinflation hit our economy. The latest inflation numbers suggest that the worst is behind us as the price of oil is in a slow fade upward, and more oil rigs are brought back online as evidenced by the upward trend on the weekly Baker Huges rig count.

All traders are watching this earnings season closely to see if the falling earnings streak is over. That’s the confirmation data point that is needed. In an inflationary environment, businesses are raising prices to keep up with the growing demand from a strengthening consumer. Traders want confirmation that the inflation we are now seeing is signaling a bottom in the earnings recession we have been in since Q1 of 2015.