Gold News

No Fed Rate-Rise Panic

Not yet. Surprises rarely come when they are expected...

The FED did as expected, writes Bill Bonner in his Diary of a Rogue Economist.

It announced last Wednesday it would raise its key rate by a quarter of a percentage point to 0.5% and gradually raise it up over the next three years.

Reports the Financial Times: "Historic gamble for Yellen, as Fed makes quarter-point rise."

If all goes well, we'll be back to "normal" in 2019...

...only 10 years after the long emergency began!

US stocks initially rose on the news, with the Dow up 224 points – or about 1.3% for the day. So those who predicted panic were wrong. (Surprises rarely come when they are expected.)

But wait...

How does the Fed know what a normal rate will be in 2019? Won't conditions change?

Besides, there are sidewalk astrologers and mall palm readers with a better record of market forecasting than the Fed.

To borrow a phrase from George Soros, our mission at the Diary is to "find the trend whose premise is false and bet against it."

Is it true that the Fed is really going to follow through with its promise to return interest rates back to normal?

Is it true that terrorists are out to get us?

Is it true that Donald Trump is a fool?

Of course, we are all fools...but some more than others. The wise man is the one who knows he is a fool. For our part, we deny it. And we resent readers who remind us.

But we admit to being wrong, from time to time. (Any man who has been married for as long as we have must be accustomed to this kind of admission.)

And since investors so heartily endorsed the Fed's move, we will reexamine our position.

The premises of the rate increase are several...

...that the Fed knows best what interest rate is good for the economy...

...that a recovery is sufficiently established to permit an end to the emergency micro rates of the last seven years...

...and that otherwise everything is more or less hunky-dory.

And they are all false?

We dismiss the first one as poppycock.

No serious economist – if there are any left – would believe that the Fed can do a better job of setting the price of credit than willing buyers and sellers.

As to the second premise – that the recovery is solid – we present evidence to the contrary practically every day.

Today, we submit to the jury some additional facts:

Last month, US industrial production fell more than any time in the last three and a half years. This marks the eighth monthly decline in 10 months. This slowdown is shadowed overseas by what Deutsche Bank describes as "a huge global Dollar nominal GDP recession – the worst since the 1960s."

According to the Fed, there are now 61 million people of working age in the US who don't have jobs. That's out of 204 million people between 15 and 64 years old. So, if you pass five people on the street, the odds are that one and a half of them is jobless.

The "labor participation rate" – the amount of people in the working-age population either employed or looking for work – is at its lowest level since 1977. For men, it has never been lower.

If it were true that the economy was in good health, how is it possible that men would have a harder time finding a job than ever before?

Now, we turn to the third premise – that everything else is more or less hunky-dory.

Supposedly, in this wide world of everything that is not directly under the Fed's control, or included in its inventory of conceits and fantasies, there is nothing that poses a serious obstacle on the road to normalcy.

If this were true, we are wrong. Because our guess is that the Fed is trapped and that it cannot continue down this road for long. It is only a matter of time until it runs into trouble.

What kind of trouble?

You can get any kind of "facts" you want. But on the road to normalcy, the Fed is bound to encounter a normal stock market selloff or a normal recession.

Ms.Yellen has dismissed worries of a recession. But unless the Fed has triumphed over the business cycle – which we doubt – a recession will appear sooner or later.

In the face of such adversity, how likely is it that the Fed will persevere?

The Fed's future actions are "data dependent," says Yellen.

But imagine if Christopher Columbus had taken a "fact-dependent" voyage across the Atlantic.

Fact No.1: He ran out of food.

Fact No. 2: His men were sick and dying of scurvy, malnutrition, and other diseases.

Fact No. 3: India was not where he thought it was.

Any one of these facts, presented to him forcefully by his crew, would have been enough to cause him to turn around.

When the going gets tough, "fact-dependent" travelers go home.

New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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