Fed Waves The White Flag On More Interest Rate Hikes

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Fed Waves The White Flag On More Interest Rate Hikes by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

June 21, 2016

IN THIS ISSUE:

1. Fed Votes Unanimously to Leave Rates Unchanged

2. Fed’s Economic Predictions Once Again Too Optimistic

3. President Obama & CIA Director Disagree on ISIS Threat

4. WEBINAR: Consumer Linked Income Portfolio – June 22

Overview

As I and others predicted last week, the Fed voted not to raise short-term interest rates at its June 14-15 policy meeting. In light of the terrible May jobs report on June 3, policymakers decided that the US economy is not strong enough for a rate hike at this point.

Not only that, the Fed also appears to be backing off of its earlier intent to raise rates at least two more times this year. Six of the 10 voting members on the policy committee now see only one minor rate hike this year, most likely at the September 20-21 policy meeting, if at all.

Following that discussion, I want to turn to a political discussion which has overheated in the last week or so. In the wake of the Orlando terrorist attack on June 12, President Obama has come under intense political criticism over his refusal to utter the words “radical Islamic terrorism.”

In what most analysts agreed was the angriest speech of his presidency, Mr. Obama lashed out at his critics last Tuesday and declared that we are winning the war against ISIS. Yet just two days later, the Director of the CIA testified before Congress that we are NOT winning the war against ISIS. He said the radical terror group remains as strong as ever and warned that there will likely be more attacks like Orlando in the weeks and months ahead. This is stunning!

Why President Obama chose to give the rosy assessment of the war on ISIS just two days before CIA Director John Brennan was scheduled to testify before the Senate Intelligence Committee is a mystery to me. Maybe it’s just because he was so angered by all the criticism, or maybe there’s more to it. I’ll give you my thoughts below.

Fed Votes Unanimously to Leave Interest Rates Unchanged

To almost no one’s surprise, the Fed voted not to raise its key short-term interest rate last Wednesday. While a number of Fed officials were vocal about raising the rate late last month, the very disappointing May unemployment report on June 3, which showed the economy produced only 38,000 new jobs last month versus a projected 160,000, dashed any hope of raising the Fed Funds rate in June.

The surprise was that the decision was unanimous among the 10 voting members of the Fed Open Market Committee (FOMC). Also surprising was the fact that six of the 10 voting members called for only one rate hike this year instead of two.

More members have decided that the US economy is simply not strong enough for two rate hikes this year. Now many Fed watchers are questioning whether there will be even one rate hike in 2016. The Fed Funds futures market now sees only a 38% chance of a rate hike in September and a 56% chance in December.

As I suggested last week, several FOMC members, including Chair Janet Yellen, wanted to see the outcome of Great Britain’s “Brexit” vote on whether to leave the European Union on Thursday. With regard to the Brexit vote, Yellen said in her post-meeting press conference:

“It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of [interest rate] policy.”

Obviously, Yellen and her colleagues continued to wrestle with conflicting US economic data over recent weeks as they pondered when next to lift the Federal Funds rate. The Committee first raised the benchmark rate back in December, ending seven years at virtually zero.

The Fed’s on-again, off-again position on raising the Fed Funds rate a second time has led to confusion among investors and a growing belief that the Fed lacks a clear vision of upcoming policy direction.

Fed’s Economic Predictions Once Again Too Optimistic

At her press conference last Wednesday, Janet Yellen’s statements, combined with economic projections from individual FOMC members, showed that the Fed Chair and her colleagues are rethinking their belief that the US economy will soon return to normal.

For years, Fed projections for US economic growth have been overly optimistic, with repeated predictions that the American economy would fairly quickly return to the sort of robust growth it was used to before the Great Recession of late 2007-early 2009.

Those projections never came true, and Fed economists have repeatedly revised down their projections of where growth and interest rates will be in the future. For example, the Fed revised down its estimate of the Fed Funds rate for 2017 from 1.9% to 1.6%, and for 2018 from 3.0% to only 2.4%.

These continued downward revisions reflect the growing reality at the Fed that this economy is not going to return to “normal” growth levels of 3% or better anytime soon. Perhaps this explains why more members of the Fed policy committee are backing away from multiple rate increases this year.

President Obama & CIA Director Disagree on ISIS Threat

In the days following the June 12 Orlando nightclub terrorist massacre which saw 49 innocent people killed and scores more wounded, President Obama received heavy criticism for his failure to call the tragedy “radical Islamic terrorism” – even though the shooter praised ISIS in one of his calls to police and was previously on the FBI’s Terrorist Watch List.

Mr. Obama was so angered by the widespread criticism that he took to the airwaves last Tuesday with a televised speech in which he excoriated his critics and angrily defended his rationale for not using that specific term. Unfortunately for him, his argument was very weak.

In that same speech, the president stated that the US is making “significant progress” in the fight against ISIS (or ISIL as he calls it) and made numerous claims of success against the terror group. He claimed that ISIS is now on the defensive in Syria and Iraq and has been so degraded that the organization is no longer capable of mounting serious attacks in the region.

He even said the terror group is struggling financially thanks to our efforts. The president said the US war on ISIS “is firing on all cylinders” and the group “is under more pressure than ever before,” Bottom line according to Obama: We are winning the war against ISIS.

I mention this because just two days later on June 16, the Director of the Central Intelligence Agency (CIA), John Brennan, openly disagreed with President Obama’s assessment of our success against ISIS. Testifying before the Senate Intelligence Committee last Thursday, Director Brennan stated:

“Unfortunately, despite all our progress against ISIL on the battlefield and in the financial realm, our efforts have not reduced the group’s terrorism capability and global reach.” [Emphasis added, GDH.]

Director Brennan warned that US efforts to defeat the Islamic State of Iraq and Syria (ISIS) have done little to diminish the threat posed by the terrorist group, and warned that there could be more Orlando-style attacks coming in America. He further warned:

“The group’s foreign branches and global networks can help preserve its capacity for terrorism regardless of events in Iraq and Syria. In fact, as the pressure mounts on ISIL, we judge that it will intensify its global terror campaign to maintain its dominance of the global terrorism agenda.”

While Brennan agreed that ISIS has taken some hits, including losing some territory it previously occupied in Iraq and Syria – he confirmed that the terror group still has between 18,000 to 22,000 fighters in the region. He cautioned that the number of ISIS fighters is still greater than al Qaeda had at its peak. He added:

“We judge that ISIL is training and attempting to deploy operatives for further attacks. ISIL has a large cadre of western fighters who could potentially serve as operatives for attacks in the West. The group is probably exploring a variety of means for infiltrating operatives into the West, including in refugee flows, smuggling routes and legitimate methods of travel.”

He stated that ISIS could attack in the US at any time, and the terror threat posed by the group remains as dangerous as ever despite efforts to crush it militarily. Brennan warned that the group already is preparing more attacks, including by infiltrating refugees into western nations. He further clarified:

“The resources needed for terrorism are very modest, and the group would have to suffer even heavier losses of territory, manpower and money for its terrorist capacity to decline significantly.”

The CIA Director, appearing just days after the massacre in Orlando that left 49 people dead, told the Senate Intelligence Committee that ‘lone wolf’ attackers who are inspired by but not under the direct control of terror groups, represent “an exceptionally challenging issue for the intelligence community.”

Brennan told the Senate Committee that Twitter, Telegram and Tumblr are ISIS’ preferred social media propaganda platforms. He stressed the need for technology and communication companies to better collaborate with law enforcement, saying that encryption was allowing terrorist groups and their sympathizers to communicate clandestinely.

“They’re taking advantage of the liberties that we’ve fought so hard to defend,” he said.

As you can clearly see, the CIA Director’s assessment of the ISIS threat is starkly different from that offered by President Obama last Tuesday. As for the accuracy of Obama’s claims that the

anti-ISIS campaign “is firing on all cylinders” and the terror group “is under more pressure than ever before,” Mr. Brennan did not comment on the president’s claims.

This is precisely why I chose to quote Director Brennan at length above, so you can make your own informed decision.

Why President Obama chose to give the rosy assessment of the war on ISIS just two days before Director Brennan was scheduled to testify before the Senate Intelligence Committee is a mystery to me.

One clue may be that President Obama was clearly very angry when he gave that speech last Tuesday, as a result of the widespread criticism he received for refusing to call the Orlando massacre the result of radical Islamic terrorism.

I won’t be surprised if there’s more to it than that, but I’ll leave it there for today.

WEBINAR: Consumer Linked Income Portfolio – Tomorrow

Are you looking for income from your investments? If yes, you’ll definitely want to join us for our next live webinar tomorrow when we interview the Portfolio Managers for the Consumer Linked Income Portfolio.

You will hear directly from Larry Kriesmer and Bernard Surovsky about this strategy which uses a basket of consumer staples stocks with a history of rising dividends that can help you enhance the income portion of your portfolio. You will also be able to ask them any questions you may have in the Q&A session at the end.

The Consumer Linked Income Portfolio is designed for investors who need regular income from their account. I believe you will be very impressed with the actual performance achieved by this strategy over the last 6+ years since its inception. As always, past performance is no guarantee of future results.

The Webinar will be on Wednesday, June 22 (tomorrow) at 4:30 Eastern time. To learn more about this webinar and to register, CLICK HERE.

I hope you can join us to learn more about this strategy that may be a good addition to your portfolio. The presentation will last about 30 minutes with Q&A to follow.

Wishing you well,

Gary D. Halbert

SPECIAL ARTICLES

Fed leaves rates unchanged at June policy meeting

Fed backs off rate hike path for now, Brexit a concern

CIA Director grave warning: ISIS as dangerous as ever

CIA Director: ISIS to “intensify” global attacks, not losing influence

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