Friday, September 22nd, 2017 MST

IMF warns Fed

In The stock market is managing the Fed, I said that the Fed will put off raising interest rate until after September because of stock market action.  Now, the IMF is using the same reasoning in arguing that the Fed should wait until 2016 before raising interest rates.

Christine Lagarde, managing director of the IMF, said, “We believe that a rate hike would be better off in early 2016.”  According to the Financial Times, “Investors fear the ensuing turmoil could be worse than the so-called ‘taper tantrum’ caused by former Fed chairman Ben Bernanke when he hinted at the tapering of the Fed’s quantitative easing programme in 2013.”  Stock and bond prices suffered during the “taper tantrum.”

Equally ominous are fears that a Fed rate hike would results in massive capital outflows from emerging markets.  Central bankers in those markets could implement restrictions on capital movements, which would freeze markets and lead to problems worldwide that would be more serious than sluggish economies.

A Fed rate hike could (most probably would) lead to appreciation in the dollar, which would badly hit emerging market companies with dollar-denominated debt, possibly defaults. According to Lagarde, raising rates too soon could result in “a bout of financial instability, causing the economy to stall.”

Only days after Lagarde’s statement, the US reported better jobs numbers than what were expected.  While the unemployment rate ticked up to 5.5 percent, the US created 280,000 jobs in May, causing optimistic economists to proclaim a recovery is on the way.  The jobs gains also caused some analysts to renew talks about higher interest rates this year.

It has been said that the Fed is the world’s central bank.  The IMF’s weighing in on a Fed interest rate hike lends credence to that position.  The stock market’s dismal response to the overall situation suggests that investors still fear a Fed rate hike this year.

I fear a Fed rate hike this year will send stocks in a downward spiral.  A long downturn in stocks would sent investors clamoring for gold and silver.  In the short-run, though, metals prices could suffer, but I continue to believe that we have seen the bottom in metals prices.  If not, we are somewhere near the lows.

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