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The stock market is managing the Fed

Following the March 18 “Statement” by the FOMC that any interest rate increase would probably not come until September, stocks moved from negative territory into big upside gains.  Truly, the markets liked the idea that any interest rate hike would put off until later in the year.

However, the following week the Dow Industrials plunged 415 points as unexpected bad numbers came from the durable goods sector.  Additionally, there was a widespread discussion that a strong dollar would reduce exports, which would negatively impact future corporate earnings.

This sent a message to Fed Chair Janet Yellen, who quickly went to work assuaging fears.

Speaking at the University Symposium in San Francisco, Friday, March 27, 2015, Yellen gave three reasons that any rate hike could be put off until after September.  First, she noted that the economy remains weak and that the Fed’s help is still needed.

Second, Yellen said that moving too quickly to raise interest rates carries more risks than acting too late.

Third, she said that there could be important economic benefits by waiting until the labor market had not only healed but also tightened considerably.  She further said that “moving slowly” could help undo some damage still lingering from the recession.

Yellen’s comments were made Friday, and Monday morning The Dow Industrials opened nearly 300 points higher.  Yellen made it clear that the Fed would remain accommodative, which means continuing a loose monetary policy.The Fed is not managing the economy but is reacting to stock market moves.  If so, the stock market is managing the Fed, and the stock market wants loose monetary policies.

So, why did gold prices fall Monday?  Because the dollar rose against the euro, its primary competition in foreign exchange markets.  It a paradox that gold would fall in price as the Fed promises still more money creation, but gold trades against the dollar, and the dollar looks a lot better than the euro.

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