What Clinton Means to the Fed

Time to think the unthinkable, starting with a Fed rate hike...

POLITICAL pundits and campaign operatives aren't the only ones that are very interested in the outcome of the upcoming Presidential election, writes Gary Dorsch at Global Money Trends.

Top officials at the Federal Reserve are also nervously watching the opinion polls to gauge whether Hillary Clinton, will win the presidency. The average of the last eight polls shows a narrowing of the race, with Clinton's +8-point lead in August shrinking to around +2% today.

Fed officials are worried about recent comments from Hillary Clinton, who now agrees with the far-left of the political spectrum and says she wants to overhaul the Fed's governing board, and re-make the inner power structure of the Fed.

Clinton now says she supports changes that are championed by progressive groups, and would seek to remove bankers from the boards of directors and try to increase "diversity" within the Fed.

"The Fed is a vital institution for our economy and the well-being of our middle class, and the American people should have no doubt that the Fed is serving the public interest. That's why Secretary Clinton believes that the Fed needs to be more representative of America as a whole and that commonsense reforms – like getting bankers off the boards of regional Federal Reserve banks – are long overdue."

Thus, a Clinton presidency could be the biggest threat to the secret cabal operating the Fed since its inception. So would the Fed be willing to make the politically risky move of hiking the federal funds rate and engineering a sharp correction in the US-stock market – ahead of the upcoming November 8th elections?

Such a move is generally thought to be un-imaginable, given that so many Fed members were approved by President Barack Obama. A pull-back in the US-stock market of 5% or more could possibly move the needle of public opinion away from the incumbent and front runner – Hillary Clinton.

Still, there are other wildcards that can change the outcome of the upcoming election. One occurred when, caught on video, Hillary Clinton collapsed as she tried to enter her mini-van after being rushed from a 9/11 memorial service – but her aides try to explain it away as 'overheating'.

Following this incident, the odds of Clinton winning the presidency slipped to 64% at the online futures market in Wellington, New Zealand, down from as high as 73% last Thursday. That's the lowest level since mid-July and below the all-time high at 79%, hit on August 10th.

At three of London's biggest bookies, Trump's odds of winning suddenly jumped to 40%, after Clinton lost consciousness on Sept 11th – and up from 32% the day before. Two smaller bookies are making a line at 42% chance of Trump winning.

So would the Fed contemplate a rate hike on Sept 21st, or about six weeks before the presidential election? A rate hike in September would be a big surprise and could knock the US stock market 3% to 5% lower. In such a tight race for the presidency, if the Fed makes the decision to hike the fed funds ceiling rate +25-bps to 0.75% at its upcoming meeting, it might be enough to tip the balance of the scales against Clinton.

Said Fed chief Janet Yellen at late-August's annual meeting of central bankers in Jackson Hole, Wyoming:

"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months."

Deputy Stanley Fischer also warned on August 26th in an interview on CNBC that the Fed could raise interest rates twice this year, with the first hike as early as September.

"What Ms Yellen said today was consistent with answering yes to questions about a rate hike in September and if two were possible by the end of the year."

Fischer hedged his comments, however, by saying the Fed would look at economic data between now and the Sept 21st meeting. He said the September jobs report would weigh heavily on the decision.

As it turned out, on September 2nd, US Labor Department apparatchiks reported that employers slowed their hiring in August to a net +151,000 jobs and strong enough to fend off worries about less than 2% growth in the second half of 2016.

Yet it was a speech delivered by one of the Fed's most strident doves, Boston Fed chief Eric Rosengren, which sent the stock market into a tizzy. His surprisingly hawkish comments knocked the Dow Industrials futures market 414 points lower, saying "the US-economy has proven resilient to Brexit and could even overheat if Fed policy remains unchanged for too much longer. If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate.

Said Rosengren, a voter on the Fed's policy committee this year:

"A reasonable case can be made for continuing to pursue a gradual normalization of monetary policy."

Earlier in the month, on September 6th, San Francisco Fed chief John William said lifting the fed funds rate makes sense now that the economy is at full employment and "within sight" of the central bank's 2% annual inflation goal.

"An increase is on the table" at the Fed's next meeting Williams warned. As such, the yield on the US 10-year T-bond rose and held at 1.68%, up from as low as 1.53% in early September.

Traders are now bracing the possibility of the once unthinkable – a Fed rate hike on Sept 21st.