The Federal Reserve will have its next FOMC meeting on 15-16 December 2015. The financial markets are speculating that Janet Yellen will finally allow a rate hike to take place. This is based on good employment data, especially the ADP jobs report that came out this week. Firms contributed a better than expected 217,000 positions for the month of November 2015. Also, with the unemployment rate at 5%, the Federal Reserve would lose credibility if it didn’t raise rates now. I think the Federal Reserve won’t increase rates (or just a small increase) because a multitude of other macro indicators (ISM manufacturing PMI, Junk bonds, commodities, Baltic Dry Index, …) are deteriorating. But let’s analyze what the consequences would be for the global economy when the Federal Reserve were to increase interest rates significantly.
FOMC
Yellen Tapering to Continue?
So Janet Yellen reduced QE from $65 billion/month to $55 billion/month in March 2014.
Let’s see if this is really the case.
Wednesday, April 2, 2014: $4.236441 trillion.
Wednesday, April 23, 2014: $4.296339 trillion
If I’m not mistaken: 4.296339 – 4.236441 = 59.898 billion. That’s already over $55 billion and the month of April isn’t even over yet.
So if they can’t even properly execute the tapering to $55 billion/month, do you think they will be able to continue tapering to $45 billion/month on the next FOMC meeting of 30 April? Especially when the stock market is rolling over?
We’ll soon find out next week. “Belgium” will be buying all these tapered bonds anyway.
FOMC Meeting Minutes
The FOMC Meeting Minutes are out, you can find the release here.
What is most important to me is this:
Inflation continued to run below the Committee’s 2 percent longer-run objective over the intermeeting period. A couple of participants expressed concern that inflation might not return to 2 percent in the next few years and suggested that a protracted period of inflation below 2 percent raised questions about whether the Committee was providing an appropriate degree of monetary accommodation.
Translated: “Maybe we should stop tapering.”
Result: Gold, bonds, stocks up. U.S. dollar down.
Federal Funds Rate Vs. Consumer Price Index
From the first FOMC meeting lead by Janet Yellen, we noticed one important statement:
“The Fed Funds Rate will be kept low when inflation stays at this low level.”
Thus, we chart the Fed Funds Rate against the CPI and get this result.
There is a strong correlation between the Fed Funds Rate and the inflation rate (CPI).
So we expect that an increase in interest rates will only happen when inflation starts to rise. The unemployment rate is not on the radar anymore.
Notice that historically the Fed Funds Rate is higher than the inflation rate (positive real interest rate (above 0%)), but today the Fed Funds Rate is lower than the inflation rate (negative real interest rate (below 0%))
Correlation Economics (Backup) 