US Fed speak – bad news is good news

Well it was another night of ‘bad news is good news’ fuelling sharemarkets.  Whilst the Fed did indeed drop their “patient” language around when they will raise interest rates, they countered with clearly ‘dovish’ talk including lowering their GDP forecast for 2015 by 12% from 2.6-3% down to 2.3-2.7%, along with 2016 and 2017 as well.  They also lowered their core inflation projection down to 1.3-1.4% from 1.5-1.8% along with 2016 as well (well away from their rate hike trigger target 2%).  Accordingly and critically it was the pace of rate hikes that was cut, now down to a median 2015 estimate of 0.625% compared to 1.125% previously.  So of course, despite clearly weaker economic fundamentals now projected… stocks rallied strongly.  The USD also came off sharply dipping below 97 before coming back to 97.7 as this is written.  That, plus surely a lot of buyers seeing this game for what it has become, saw gold and silver up strongly.  We didn’t see that here in AUD terms as our dollar went up against the falling USD.  We wrote on Friday about why they can’t raise rates.  Now they have stopped the QE money printing presses rates are their only tool.  But the problem is they can’t go much lower and they know they can’t actually raise them by any meaningful amount.  So they are using words to play the market and keep it going on its hunt for yield in a zero interest world.  

So last night was just a change in words with basically the same message.  The economy is still too poor to raise rates – so go forth and use this free money to inflate the bubble further.  There are currently 25 nations around the world dropping their rates to try and stimulate their economies.  Whilst the US would like to think it is immune, it is a part of the world economy and its hard to see it raising rates when everyone else is dropping them.  Either way could be good for gold.  Raise them and we will surely see something ‘snap’ somewhere bringing down the interlinked global markets.  Keep them as is or even join the rest in lowering them (a few are now negative) and the bubble will no doubt pop.  By all means you can play this ‘don’t fight the Fed’ game in shares but there has rarely been a time when a safe haven hedge should be a substantial part of your investment portfolio for when, not if, this ends very badly.

Ex US Fed Chairman Ben Bernanke has said recently there will be no rate normalisation in his lifetime.  He may just be right…