Wednesday, March 30, 2016

Yellen's Speech Confirms #TheFed Bowing To International Pressures

The Fed's decision to delay liftoff in March, a move to hold its benchmark rate target at 0.25 percent to 0.5 percent and reduce expectation for future rate hikes in 2016 comes after global finance ministers and central bank governors agreed in Shanghai last month to use all policy tools to strengthen growth.  The Feds new focus on international concerns and policy objectives, referred to twice in the Open Market Committee’s statement, was supported by her speech to the Economic Club of New York,

“The central bank will move cautiously as it weighs interest rate hikes in light of a weak global economy and stubbornly low inflation, raising questions about whether policymakers will make a move this spring.

Clearly the Fed has assumed the unofficial roles as savior to Europe by delaying liftoff (interest rates hike) to protect the European economy, failing European banks, and ultimately the Euro ahead of important Brexit vote in Britain in June. Good luck with that! Britain should leave the EU and restore their sovereignty, but that will likely prove to be an idyllic dream squashed by the reality power and influence. One-side propaganda promoting its short-term consequences over a myriad of long-term benefits has many Britons afraid to leave and change what they know.  The Pound will suffer as a result.

Those recognizing the growing risks within the global economy and sovereign debt ignore the propaganda and act proactively. As the number of countries running deficits grows with each passing day, the number of investors (smart money) willing to support them through debt purchases is quietly contracting. Smart money knows that zero and negative interest rate monetary policies (ZIRP and NIRP) leave central bankers with very little wiggle room of influence during the coming economic and financial crisis. This is the main reason why smart money is reallocating from old safe havens of sovereign debt to new ones such as AAA-rate corporate debt and blue chip stocks as the global economy weakens (EAC). This reallocation, a powerful flow of capital already underway, will drive the dollar higher regardless of Fed or any central banker policies (see Review of US Dollar Index).

Headline: Global Risks Play Bigger Part in Fed's Rate-Rise Outlook

For the first time since the Asian and Russian crises rocked world financial markets in the late 1990s, U.S. monetary policy is as focused on the risks to global growth as it is on the domestic economy.

Driving the resurgent internationalism inside the Federal Reserve is concern about how dollar strength -- reinforced by aggressive policy easing abroad -- could keep U.S. inflation too low when the Fed’s policy rate is close to zero. Another worry is a global economy that’s lumbering along without a prominent engine of growth, said Jon Faust, a former adviser to Fed Chair Janet Yellen.

“We have learned that the world is a more fragile place,” said Faust, who is now the director of the Center for Financial Economics at Johns Hopkins University in Baltimore. “At times like this, you don’t want to risk a significant slip because globally there are so few economies with really strong policy options.”



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