FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
March 15, 2016
Will The Fed Raise Rates Tomorrow? Probably Not
What does value investing really mean? Q1 2021 hedge fund letters, conferences and more Some investors might argue value investing means buying stocks trading at a discount to net asset value or book value. This is the sort of value investing Benjamin Graham pioneered in the early 1920s and 1930s. Other investors might argue value Read More
IN THIS ISSUE:
1. Fed in a Tough Spot as Inflation Ticks Up to 2.2%
2. The Fed Has a Real Dilemma on Its Hands Now
3. Abolishing Cash – Stratfor’s Latest Analysis
4. Conclusions – Abolishing Cash
Abolishing Cash – Overview
The Federal Reserve’s policy setting body, the Fed Open Market Committee (FOMC), is meeting today and tomorrow, and there is widespread speculation over whether or not the Committee will vote to raise the Fed Funds rate a second time since lift-off in December.
Late last year the Fed signaled that it intended to raise the Fed Funds rate four times in 2016, most likely at the March, June, September and December FOMC meetings. Yet the Fed could not have anticipated the global stock market debacle that ensued at the beginning of this year and into February.
Given the large and unexpected global equity sell-off we saw in January and early February, most Fed-watchers recently concluded that the FOMC would abandon its plans to hike rates four times this year. Many even speculated that the Fed might reverse course and lower the Fed Funds rate back to near zero. Some even suggested the Fed should implement another round of quantitative easing (QE).
I have been among those who have suggested the Fed should delay any further interest rate hikes until the economy shows more signs of improvement. However, a recent economic report will make it much harder for the Fed to delay another rate hike tomorrow. That will be our main topic today.
Following that discussion, I’ll have more to say about negative interest rates, the War On Cash and a summary of Stratfor.com’s latest analysis regarding this very concerning global trend. Let’s get started.
Fed In a Tough Spot as Inflation Ticks Up to 2.2%
For the last several years, the Fed has maintained that its “core” inflation (minus food and energy) target is 2.0%. Somehow, the Fed believes that we need 2% inflation to have a healthy economy. Yet core inflation has consistently remained well below the Fed’s 2% objective – that is until the February Consumer Price Index (CPI) report from the Department of Labor. On February 19, the DOL reported that core CPI rose 2.2% in the 12 months ended in January of this year. Notice the final number (bottom right) in the DOL inflation chart below.
Think about this. The Fed has been predicting that core inflation would rise above 2% any day now for the last several years. They used this inflation prediction as a rationale for ending QE in late October 2014. They used it as justification for the first Fed Funds rate hike in December, even though core inflation was nowhere near the Fed’s 2% target.
Yet while core inflation has failed to reach the Fed’s 2% prediction repeatedly, we are now there – actually above there at 2.2% – at least according to the latest Labor Department CPI report in February, which showed core inflation at 2.2%.
At this point, I should add that the Fed’s favorite measure of inflation is not the Labor Department’s Consumer Price Index. The Fed prefers to monitor another indicator of inflation called the Personal Consumption Expenditures Index (PCE), which is produced by the Commerce Department as a component of its periodic reports on Gross Domestic Product.
The PCE consists of the actual and imputed expenditures of households and includes data pertaining to durable and non-durable goods and services. It is essentially a measure of the prices of goods and services that we all consume. While the PCE is slightly different, it trends very closely with the CPI.
The latest data for the PCE is for January and was released on February 26. The core PCE (again less food and energy) rose 1.67% for the 12 months ended January. So while core CPI rose 2.2% over the last 12 months, core PCE remained under the Fed’s target of 2%.
While the Fed’s preferred PCE measure of inflation has not yet reached the Fed’s 2% threshold, the trend has indeed turned higher, and it presumably will not be much longer before it crosses into the Fed’s target zone of 2%.
The Fed Has a Real Dilemma on Its Hands
So the Fed has a dilemma on its hands as the FOMC convenes this week to make a critical policy decision. On the one hand, the stock market rout earlier this year would suggest that the Fed delay any further interest rate hikes until later this year, although most global equity markets have recovered much of the January/February losses.
On the other hand, with core CPI up 2.2% in the last 12 months, and with core PCE clearly headed toward the same level, the Fed may feel compelled to raise rates a second timetomorrow in an effort to keep inflation from moving above its target of 2%.
Since the stock market plunge in January, several Fed officials have gone on record saying that a second Fed Funds rate increase should be delayed, perhaps indefinitely. But that was before the February 19 DOL report showing that January core CPI rose 2.2% over the last 12 months.
The Fed believes it has a mandate to keep inflation near 2%. But it also believes that it has a mandate to keep the economy (and I would argue the equity markets) growing. So it will be very interesting to see what the Fed decides tomorrow.
I believe that if the Fed raises rates again tomorrow, it will have another very negative effect on the US and global equity markets. The US and global equity markets are hooked on Fed easing and extremely low short-term interest rates.
At this point, I’m supposed to make a prediction on what the Fed will decide tomorrow. The truth is, I don’t know but I will make a prediction anyway. Fed Chair Janet Yellen is a “dove,” meaning she is less likely to make tough decisions.
So my prediction is that the Fed will delay another rate hike until the June 14-15 FOMC meeting or even later. But I could be wrong. We’ll see.
In any event, we’ll know what the Fed decides tomorrow afternoon. If there are any surprises, I’ll address them in my blog on Thursday. If you haven’t subscribed to my free blog, CLICK HERE.
Abolishing Cash – Stratfor’s Latest Analysis
I have written in recent weeks about the ramifications of negative interest rates and the ongoing war on cash. Negative interest rates impose a tax on savers who will have to pay a fee to park their savings at banks.
The war on cash is intimately related to negative interest rates as I will discuss below. There are movements afoot in Europe and elsewhere to eliminate large currency bills such as the 500 Euro Note and even calls (from liberals) to get rid of the US $100 bill. There is a reason for this war on cash that we all need to understand.
There is also a distinct correlation between negative interest rates and Abolishing Cash that we should all be aware of. Let’s roll up our sleeves and get started. Stratfor.com recently released an excellent analysis on the subject of negative interest rates and the war on cash. I will summarize it for you below.
Long-time clients and readers will immediately recognize Stratfor.com since I have quoted and analyzed their work for years in my E-Letter. Yet for the benefit of our many newer clients and readers, Stratfor is (in my opinion) the leading private geopolitical intelligence network in the world. I have been a subscriber for over 15 years.
Back to our topic, negative interest rates and the war on cash, Stratfor offered some keen insights on February 29. To begin with, Stratfor very much agrees with the view I presented to you on February 23 that negative interest rates are but a part of the larger war on cash. Liberals in Europe and even many in the US would love to move us to a “Cashless Society”with all electronic transactions that can be monitored (Big Brother).
Of course, those promoting the war on cash would never admit publicly that they want to move to a cashless society, so they masquerade it as a War On Crime. European leaders claim that the euro’s highest denomination bills are favored by crime groups for transferring massive sums of money across international borders. And this is true. The same is true in the US with regard to $100 bills. It’s true all over the world and has been for centuries.
So why the push all of a sudden to eliminate high-denomination currency notes and bills? Part of it is due to a publication in early February by a high-profile (liberal) Harvard professor named Peter Sands. The paper, entitled Making it Harder for the Bad Guys: The Case for Eliminating High-Denomination Notes, calls on leaders around the world to decommission their largest notes and bills – including the 500-euro, the 1,000-Swiss franc, the 10,000-Japanese yen and even the US $100 bill. All this in the name of fighting crime.
While eliminating large denomination notes and bills would make it more difficult for criminals to finance transactions in cash, Stratfor was quick to point out that crime is NOT the real driver behind negative interest rates and the war on cash. They note clearly with respect to the plans to decommission the €500 note:
The elimination of the euro’s highest denomination is the latest step in a longer-term move toward a cashless society, prompted by factors such as the growing use of negative interest rates and capital controls worldwide.[Emphasis mine.]
The big threat today, with negative interest rates in Europe, Denmark, Sweden, Switzerland and most recently Japan, is that depositors will withdraw their bank balances and hold their money in physical cash, rather than pay a fee to keep it in banks. Stratfor notes:
Electronic money eliminates this [hoarding cash] threat, of course, since money that cannot be held physically cannot be withdrawn. In theory, then, a cashless society frees up central banks to explore an entirely new set of financial tools, which could be useful in fighting the low inflation that has so far defied already unprecedentedly low interest rates.
Unfortunately, Stratfor is not very optimistic that the trend toward a cashless society can be stopped, due in part to rapid advances in technology that make it easier for liberals to move us away from cash and towards an all-electronic transaction system. Stratfor adds:
All of these trends, allied with the unstoppable progress of technology, will likely make cashless transactions ever more prevalent in the global economy, especially as the emerging economies of Africa and India embrace concepts such as mobile banking. Of course, widespread monetary trauma or a loss of faith in central institutions could drive citizens back to cash or even into gold.
But such retreats will only slow the trend; they are unlikely to reverse it. The next step in the process will be the continued phasing out of higher-denomination notes, as international governments collude to make life harder for criminal networks. The first of these is likely to be the 500-euro note, despite the objections of Austria, Luxembourg and Germany. [Emphasis mine.]
Conclusions – Abolishing Cash
For many around the developed world, we are already a cashless society. How many times have you seen someone use their credit card to make a purchase of less than $5? I saw a man buy a $2 head of lettuce, his only purchase, with a credit card (not a debit card) at a store just last Saturday. We are becoming all credit or debit cards all the time.
I don’t know about you, but I like having several hundred dollars of cash in my wallet in case of emergency. Maybe I’m just weird, but I don’t think so.
The point you should take away today is that our government (the liberals that is) would very much like to move to a cashless society where all transactions can be monitored. This global push is not aimed at the criminals as they would like us to believe, but at you and me. Remember that!
I could go on and on with this subject, but I will leave it there for today. Yet I will stay on this critical topic in the weeks and months ahead.
Wishing you well,
Gary D. Halbert
Abolishing Cash – SPECIAL ARTICLES
Fed grapples with split economy
Why Big Government is Waging War Against Cash (excellent read)
Economists warn of risks from negative interest rates