The Fed, Data Dependency, and Interest Rates

Just like the canary in a coal mine, the Federal Reserve utilizes economic data to ascertain the current economic environment. More importantly, this data is used to create a forecasting model from which future monetary policies are developed and implemented.

Market participants, investors, and traders also rely heavily on this “canary” to anticipate the future actions of the Federal Reserve. Today was no exception to this rule.

Economic data released today by the Labor Department revealed that consumer prices in the United States were, in essence, unchanged in June, and more importantly, retail sales came in weak and decreased for the second month in a row. Given that the CPI dropped 0.1% in May, many analysts believe that the Federal Reserve will have to curtail or slow the pace of rising interest rates.

In an interview with Reuters, Joel Naroff, economic advisor in Holland, Pennsylvania said, “Today's reports imply that the Fed will go very slowly normalizing rates, but it also means that businesses will have to really hustle to find ways to keep earnings growing strongly,”

Janet Yellen’s Testimony

Today’s Labor Department report comes immediately following testimony given earlier this week by the Federal Reserve’s Chairwoman Janet Yellen in her semiannual monetary policy report. Her carefully worded prewritten statements to both the House and Senate, as well as her answers to questions, revealed a more dovish economic stance than previously perceived.

A One-Two Combo

The net effect of Yellen’s testimony and today’s CPI report by the Labor Department has resulted in vast and extensive repercussions. These events when viewed together signal a much less aggressive Fed regarding their pace to normalize by raising interest rates.

U.S. equities surged, and the Dow Jones Industrial Average, Standard & Poor’s 500, and the NASDAQ composite all closed either at the all-time record high or a new record high. The U.S. dollar continued to fall dramatically, losing almost 7/10 of a percent of value when compared to the other currencies in the dollar index.

Lastly, precious metals surged with gold gaining over $10 today, to close at $1227 90, and silver gained over a 1 ½% in value. The powerful finish in US equities and the precious metals is a trend I expect to spill over into next week’s trading activity.

Wishing you as always, good trading,