Gold News

Fed Goes Crackers as 2016 Begins

The confidence game of central banking works just fine. Until it doesn't...
 
FORGET the glut in crude oil, copper, cargo ships or Chinese steel capacity, writes Adrian Ash at BullionVault.
 
Cheese. There is too much cheese, says Bloomberg.
 
That is why the price of US cheddar cheese blocks – a tradable asset, apparently – fell to new 5-year lows as 2015 drew to a close. Cheese futures for December delivery hit their lowest price since April. 
 
"We're making a lot of cheese and not selling a lot of it," says one dairy manager. 
 
"So it's all going into storage for the moment." 
 
This cheese glut, of course, is the global economic environment into which the US Federal Reserve this month raised its key interest rate at last.
 
Hence the humming and haw-ing in the Fed's accompanying statement, forecasts and press conference.
 
Yes, rates have been too low for too long. Yes, financial assets have been bid up to untold records...squashing the yield they offer to nothing...as the glut of money which zero rates have created forced otherwise cautious savers into all manner of half-baked "collectibles" and "luxury goods" at auction...
 
...not to mention real estate, high-yields "junk" bonds and investment scams. 
 
So the Fed basically promised that "lift off" from zero would start in 2015. That madeyesterday's rate-rise a 100% certainty if markets weren't to collapse on a loss of confidence in everything Janet Yellen ever says. 
 
But this rating-hiking cycle – the first begun since 2004 – is not like any rate-rising cycle the world has ever seen before. 
 
First it starts from near zero. Second, the rest of the world (besides US Dollar-pegged Hong Kong) is going in the other direction, either sitting tight at record lows (like a raft of central bank decisions already since the Fed's measly quarter-point hike) or cutting further (like Taiwan did immediately after).
 
Third, but most crucially, it's a rate rise which the Fed didn't want to make and doesn't believe it should. 
 
Because – thanks to all those gluts in oil, copper and cheese – inflation is missing. And while a strong labour market is one half of the Fed's mandate, the other half is stability in consumer prices. Which the Fed says means 2.0% inflation. And which, by a remarkable coincidence, the entire Fed policy team unanimously says will be the pace of inflation in the "long run".
 
FOMC forecasts for PCE inflation
But its other forecasts? These people voted 9-1 against raising rates in October. With nothing changed, they voted 10-0 in December to hike after all. 
 
Really, these folks don't know what they're doing. They're making it up as they go along. 
 
Most of the time this doesn't matter. Because the world gets by regardless and in spite of them. 
 
But every so often...as in the 1970s or say 2008...the world suddenly spots the problem. 
 
This confidence game is a con trick. Fingers crossed the markets don't notice in 2016.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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