What You Should Know Before The Fed Meets Next

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“The US economy is coming to an extremely weak patch. Very close to recession. There is no way the Fed is going to raise rates for that reason alone.” Said Jim Rickards while speaking yesterday on CNBC.  

For those that might not know Rickards, he is a best selling author and has 35 years of experience working in capital markets on Wall Street.

Rickards followed this up by saying, “But if they did raise rates (let’s) look at the one time they raised rates last December alone, US stocks fell 11% in six weeks between January 1 and February 10 2016. Raising rates now would cause a similar reaction, maybe worse.”

The U.S Federal Reserve, the de-facto leading central bank in the world, is currently faced with the decision of whether it should raise interest rates.  Currently, rates stand at .50%.

Below are five reasons that the Fed will not change rates when it meets next week:

Industrial Production Is Down

Industrial production in US fell 0.4% in August, the biggest shrink in production since March.  The industrial production numbers might seem fickle. They’re not.  This drop gives an indicator that the demand for goods manufactured in the U.S is down.  Ultimately, it shows that growth is slowing across the economy in a broad context.

Retail Sales Have Fallen

U.S August retail sales fall 0.3% according to a Commerce Department report. Its back to school shopping season. Crayons, notebooks, backpacks and “first day of school” sneakers. Not this year. As of August 8 out of 13 retail categories that the Commerce Department measures fell in month-to-month comparisons.  Raising interest rates this early into peak consumer spending season would send ripples throughout the economy.  Fed chair, Janet Yellen is all too aware of this.    

Historically, Rate Hikes Bring Trouble

History, the last time the Fed raised rates – the repercussions on the market sent it back to 2008 levels.  By December 2015, the last time the Fed raised rates, both The S&P 500 and Dow Jones industrial closed with their worst years since 2008.  Even Apple, the maker of the iPhone and a historically market moving stock, had its worst year since the ‘08 recession.  If rates were to be raised in the face of U.S elections, holiday spending and mounting retail/production numbers – history shows that it would create a cocktail for disaster.  Peg charts might say one thing, but the practicality of Yellen’s history book shows a completely different story.  

Unemployment Remains Stagnant

According to the latest Bureau of Labor Statistics situational report released on September 2, the unemployed and part time work numbers for the United States as of August are both unchanged over the past 12 months.  As part of the Fed’s dual-mandate, it is to maximize employment numbers.  While this Fed objective has not been met, raising interest rates could tighten wage numbers and potential employers eagerness to continue hiring.

Fear Is Swirling In The Market

Reporting from MarketWatch paints an even scarier prospect, “The CBOE Volatility Index (VIX), often used as a measure of fear in the market, rose 18%…its highest level since June 28 and implying that investors are starting to dial up bets that stocks could suffer…” Want to know who is going to win the game, look to Vegas. Want to know where the market psyche is headed, watch the VIX. While the market be at record high numbers, there is real fear in the air.  Moving interest rates would enable this mounting fear – and if there is one thing that markets fear most, it’s surprises.

So what’s next?

Jim Rickards followed in his CNBC interview by saying, “December is more interesting. If this economic weakness continues, I would expect that the Fed might actually cut rates. Though they could only do 25 basis points before going negative in early 2017.”

The future is not unknown, its unknowable. So we continue to watch.

Regards,

Craig Wilson
for the Daily Reckoning

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