Federal Reserve Blows It Again, Sets Stage For The Stumble
Yesterday the Federal Reserve Open Market Committee (FOMC) raised interest rates for the third time since the end of the Financial Crisis of 2007 to 2009. This begs the question does the theme of "three steps and a stumble" now come into play?
This theme of "three steps and a stumble" refers to the FOMC raising rates three time and then the stock market taking a stumble, often serious. Why? It is pretty simple. The Federal Reserve is weak on forecasting and they rely on forecasts as opposed to data to drive interest rate moves.
Unfortunately, the FOMC should stick to data or hire Bridgewater Associates, the biggest hedge fund around that does only data, to advise them. Clearly, those that live in ivory towers tend to be flawed in forecasting.
Yesterday after the rate announcement, the Federal Reserve Chairman held a press conference with the media. Many missed or decided to ignore, which I believe the majority did, a great exchange between Kathleen Hays of Bloomberg and Federal Reserve Chairman Janet Yellen. I did not ignore it and today the market seems to be picking up on it as well.
Stocks and bonds are lower reversing yesterday's gains. The Dollar continues to fall. Gold is higher for a second day. We recommended Gold in Gold & Energy Options Trader yesterday after the announcement via GLD with the May $115 Calls when they were trading at $3.20. Today the calls at $3.55 up $0.35 or 11%.
Kathleen Hays called out Chairman Yellen for raising rates when the economy is faltering. The Chairman tried to backtrack BUT she was clearly flustered and failed to make any sense. The takeaway is the Chairman effectively said forecasting trumps data. Unfortunately, the Federal Reserve has proven to be poor at inept at forecasting.
Instead of trying to summarize this back and forth between Yellen and Hays we feel it makes more sense to post the interchange for your review.
This interchange may be the most important article you read this week, month or even year. Enjoy.