To raise or not to raise | CMI Gold & Silver
Tuesday, January 31st, 2023 MST

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To raise or not to raise

All year, members of the FOMC (Federal Open Market Committee) have made speeches and given interviews where they have hinted at raising rates at the next meeting, but the meetings came and went without rate hikes despite what some economists call improving economic indicators such as the lower unemployment rate.

Now, they’re strongly suggesting a rate hike in December. But, will they?

Despite the official unemployment rate dropping to 5%, which traditionally has been labeled “full employment,” the Civilian Labor Force Participation Rate has been in decline for seven years and stands at a 38-year low. Hardly a sign of a healthy economy.

Bills blog 12_1_15

Consider also that the 5% unemployment rate doesn’t take into consideration all the part-time workers who would like full-time employment. A Fed gauge that considers such workers stands at nearly ten percent.

Additionally, industrial production fell .2% in October vs. a .1% expected rise. And, the latest Market Flash Purchasing Managers Index for November registered 52.6, down from October’s reading and a 25-month low for this index.

Further, the European Central Bank recently announced that it was going to increase its quantitative easing, which will further weaken the euro and effectively lower interest rates in Europe. Because the euro is the dollar’s major competitor, lower borrowing rates for the euro is tantamount to a rate hike in the US.

And, the Bank of Japan continues its massive QE program, which is designed to further weaken the yen.

But wait! There’s more.

A rate hike by the Fed will not impact only the US but the world, for truly we live in a global economy. Christine Lagarde, IMF Managing Director, has repeatedly called on the Fed not to increase rates, asserting that a rate hike in the US would wreak havoc in the emerging markets. And, how right she has been.

According to the Financial Times, “Investors are in full flight. The Institute for International Finance estimates that emerging markets will lose $540bn of capital in 2015, with the third quarter likely to have seen the fastest withdrawal of “hot money” since the panic after the US bank Lehman Brothers failed in 2008.”

Truly, a Fed rate hike would have a devastating impact on markets worldwide, and surely members of the FOMC know this. So, why all the talk about raising rates this year?

Here’s the head game I suspect they are playing. Mario Draghi got away with repeatedly saying that the ECB would do “whatever necessary to protect the euro,” and investors hung with the euro as crises (Greece, namely) came and went.

Now, I suspect the Fed is employing a similar tactic: keep talking about raising interest rates but not doing it.

What the Fed would like to see is a strong stock market after much discussion of raising rates. However, hawkish comments torpedoed several stock market rallies this year and even caused some severe declines.

Significant is that the Dow Industrials have failed to top their May high of 18,315. Had stock investors pushed stock prices higher after talk of higher interest rates, the Fed would have felt comfortable in raising rates. But, that has not happened.

This financial market expects — and it is getting — easy money. I remain doubtful that the FOMC will raise rates in December, which will be positive for stocks and for gold.

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