The Fed Capitulates
In the June 15, 2016 FOMC statement, associated projections and subsequent news conference, investors finally heard from the Fed itself what we have been saying for years: the Fed has no idea what it is doing.
The Fed Capitulates
In the June 15, 2016 FOMC statement, associated projections and subsequent news conference, investors finally heard from the Fed itself what we have been saying for years: the Fed has no idea what it is doing. The Fed walked away from its previous optimistic economic projections and aggressively marked down its outlook for interest rate hikes. In an about-face that could not have been more dovish, the Fed essentially admitted that its projections have been pure fantasy, its policies have failed to stimulate economic growth and it will not be able to normalize interest rates any time soon.
DoubleLine Capital's Jeff Grunlach responded that the "rate hike cycle has left the building".
The shift towards reality was made even clearer two days later when James Bullard, president of the Federal Reserve Bank of St. Louis President and the Fed's most hawkish governor, said Friday he expects only one more interest-rate increase through 2018 because he no longer expects the U.S. economy to pick up during that time.
Bullard's regional bank had previously forecast the economy to grow faster than its recent 2% annual rate for the next few years, causing unemployment to keep falling and inflation to temporarily exceed the Fed's 2% target.Now, because of slow productivity growth and other factors, he believes growth will stick to its current modest pace, causing joblessness and inflation to stay about where they are now. His conclusion is that the Fed should raise its benchmark federal-funds rate by just one quarter percentage point this year and hold it steady after that through 2018.
Perhaps even more interesting than Bullard's comments was the fact that there was little reaction in the markets, suggesting that such thinking is now basically "priced in." In fact, the Fed Funds market is now predicting just one rate hike over the next three years. In our view, a recession is on the way. The current growth cycle is already twice the duration of the average US expansion, so the Fed's next move is virtually certain to be a rate cut, not a hike.
For the past four years, gold has essentially been fighting the Fed. Year after year, the Fed has been promising monetary accommodation as needed, higher economic growth right around the corner and a gradual normalization of interest rates. In their goldilocks scenario, if you believed it, there was every reason to own stocks and no rationale for gold. This narrative is now over. Gold is free to find its appropriate level in a high-risk world where the Fed is no longer a credible guarantor of good outcomes. We expect that many investors will choose to increase their allocation to gold. Some of the world's best known investors are already reportedly doing so including Grunlach, Stanley Druckenmiller, George Soros and Paul Singer.