Lift off! - Ainslie Bullion News

So in the least surprising move in some time the US Fed FOMC committee this morning voted unanimously to lift the US fund rate by 0.25% to 0.5%.  In a classic case of buy the rumour, sell the news instead of predictions of immediate carnage we saw an almost bipolar reaction of both shares and gold and silver both surging on the news.  The survey of officials, the so called dot chart, indicates expectations of the rate hitting 1.375% by the end of 2016.  But let’s be clear, that is ‘expectations’ not fact.  If we look at the 2 previous hiking cycles and the environment they were in it gets a little scary looking.  Recall too our previous article on their track record.

They previously hiked from 1994 to 1995 and 2004 to 2006.  Let’s compare:

Both 1994 and 2004 had higher unemployment rates but their participation rate was much higher (we are at nearly 40 year highs of ‘given up’) and earnings growth was also much higher then (household incomes are at a decade low in real terms now).

Inflation in 1994 was 2.1% and 2004 at 2.8%.  Today it sits at just 0.2%, well below the Fed’s ‘target’ of 2% which they seem to have given up on waiting for and are resorting to talking up ‘expectations’ of a rise this coming year.  Just remember there are only 2 ways to deal with the record debt they have racked up and that is inflate it away or default. Raising rates amongst 0.2% inflation is part of the “policy error” call of many analysts.

GDP growth in 1994 was 3.4%, in 2004 it was 4.2%.  Today it sits at just 2.2%.  To give this weak number more gravity consider that in 1994 global growth was 3.4% and in 2004 it was 5.4%.  Today it is just 3.1% (bolstered heavily by a falling, not stable, Chinese GDP).  Worse still the share of US GDP from exports is now up to 12.5% compared to only mid 9’s% for the previous.  As we predictably saw last night, higher rates mean higher USD which will put more pressure on US GDP as the USD make their exports more uncompetitive, especially as China (and everyone else) keeps devaluing their currency.

Finally, and tellingly, the 1994 tightening cycle started after just over 2 years of post-recession recovery and 2004 after 2.5 years.  Today is 6.5 years after the recession technically ended.  This period also included unprecedented money printing to help stimulate the economy.  It quite simply hasn’t worked and 6.5 years marks ‘too long’ and they just had to do it and hope.  The following chart from short term money market expectations maybe says it all….