We're Not Too Sure About Janet Yellen's Economic Forecast

The #Fed has NEVER correctly forecast a recession.

 — Jim Rickards December 16, 2015
 

The Fed announced that it would increase its benchmark rate by one quarter of a percentage point. The major beneficiaries will be the banks and brokers, not people on Main Street. Runnymede believes the US and world economies will weaken in the quarters ahead. Our view is supported by Jim Rogers, a top investor, and Sam Zell, a real estate tycoon.

The Fed has a very different opinion. Who will be right?

Is the Fed rate hike a big mistake?

The FOMC is set to meet on December 15-16 and the market is finally buying the rhetoric that a rate lift off will begin this month. While Fed chair Janet Yellen has been hinting at a potential rate increase for much of the year, the financial markets are now pricing in the reality. Economists can argue whether it is the right or wrong decision, but the fact remains that the Fed is now highly likely to raise rates for the first time since June 2006. As you can see the 90 day T-bill rate is moving up sharply in anticipation.

3 Reasons Why the Fed Won't Raise Rates and Is More Likely to Ease

Back in March 2015, we wrote that you shouldn't count on the Fed to raise rates in 2015 because of deflation and slowing growth. In September, we wrote that recession is just around the corner in the US.

Therefore (unlike the street), we were not surprised by Friday's weak job report where job growth was less than expected. Not only that, wages disappointed, revisions to August's report were bad, and the participation rate fell to a new 38-year-low.

It's time for investors to stop listening to the media noise and if you look at the the actual data, you can only reach one conclusion: the Fed will not raise rates in 2015 or 2016, but they will soon turn 180 degrees and start talking about the next round of QE (quantitative easing) and/or negative rates

Let's take a look at 3 reasons why the data dependent Fed can't raise rates anytime soon.

Why the Fed won't raise rates in 2015 in one simple chart

Today with bated breath, the financial markets are waiting on the FOMC statement for any hints of a potential rate hike in 2015. Many economists are still expecting a hike in September or October but at Runnymede, we remain highly skeptical that the Fed will raise rates in 2015. Like we have been saying since March, the data dependent Fed just doesn't have the numbers to justify their first rate hike. Janet Yellen and the Fed target 2% inflation and sorry we aren't anywhere near that number. She should be more worried about deflation than inflation at this point.

Financial weather: Central bankers creating clear skies

In 2008, the brokers and bankers made a huge mess in the subprime mortgage markets and caused the deepest recession in decades. The finanical crisis cost the tax payers trillions of dollars to bail out the failed financial firms and to restart the nation’s economic growth engine. The message during the market recovery to Wall Street from the central bank and the government has been “don’t mess with the financial markets to cause another market crash.” The media and many pundits haven't got the message and are still writing very frequently about the impending market crash. With the recent news on Greece, the media went all out to scare people but we wrote that investors shouldn't be surprised given Greece's history of debt problems. The S&P 500 shrugged off the negative news and barely declined at all, a pullback of just 3%. Looking at the trend, you’ll notice that the S&P 500 has been trading sideways at 2080 plus or minus a few points in a narrow range since November 2014.

What a Greek bankruptcy means to your investment portfolio

A potential Greek bankruptcy has dominated the headlines over the past couple of weeks and this Sunday is a crucial referendum to decide their fate. The Greek PM Alexis Tsipras today urged its citizens to reject an international bailout deal. Many economists and investors are now expecting a bankruptcy in the near term. The big question for investors is: what does a Greek bankruptcy mean to my investment portfolio?

IMF urges Fed to delay interest rate hike until 2016

The International Monetary Fund urged the Federal Reserve to wait until the first half of 2016 to start raising short-term interest rates because the U.S. economy remains subpar. This is an unprecedented event as I can't recall a time that the IMF has ever tried to influence Federal Reserve policy. The IMF predicted the economy will grow 2.4% this year, down from its April forecast of 3.1% and the second time it cut growth targets this year.

The invisible hand of central bankers and government intervention

The financial markets are guided by supply and demand conditions for stocks and bonds. Historically, their fluctuations have been heavily influenced by business conditions and economic cycles. During the past 12-15 months something new and different has dominated the marketplace. Unorthodox governmental forces are the engine that drives the financial markets which seem totally insensitive to any negative economic developments.

Central bankers are giving out easy money

"I want the easy
Easy money
Easy money
I want the good times
Oh, I never had
I want the easy
Easy money
I want the good life
I want it bad"  -- Billy Joel

Will the Fed raise rates in 2015? Don't count on it

Yesterday, the Federal Reserve removed its "patient" language, as expected, but Fed Chair Janet Yellen delivered her best quote yet:

Just because we removed the word 'patient' from the statement, doesn't mean we're going to be impatient.

With many investors still expecting a first rate increase in 2015 (perhaps in September), you shouldn't count on it. Why? It's actually quite simple. Yellen repeatedly tells the market that the Fed's decision is data dependent on whether it will raise rates or not. So if you look at the data, there is nothing in the data telling us that a rate increase will come in 2015 at all. Let's look at the numbers.

IMPORTANT DISCLOSURE INFORMATION 

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Runnymede Capital Management, Inc.-"Runnymede"), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Runnymede.  Please remember that if you are a Runnymede client, it remains your responsibility to advise Runnymede, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Runnymede is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Runnymede's current written disclosure Brochure discussing our advisory services and fees is available for review upon request. Please Note: Runnymede does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Runnymede's web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

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