Fed Leaves Rates Unchanged, Markets Digest and Precious Metals Soar

Here are the three main reasons the Fed held pat. Lack of inflation. The absence of inflation. The disappearance of inflation.

In the run-up to the Fed’s September announcement today, equities held steady to lower and gold rose over $11.00 per ounce.

After a qualified “hold” with three dissents, equities popped a bit whereas now they are trading up smartly higher, the Dow and S&P nearing record territory and the NASDAQ hving already closed at new high.

Gold continued its sharp upturn after the announcement and silver took the bit in its mouth and galloped higher on the day well over 3.00%.

Esther George, Loretta Mester and Eric Rosengren dissented but Rosengren’s dissent was quite different from George’s and Mester’s. Rosengren believes there is a stock bubble forming – no doubt a misguided apprehension of conditions, since recently equities are off their record highs. The other two Fed regional presidents want rate hikes for standard-issue reasons: fear of inflation and overemployment.

Either way you look at it, the three are absolutely, positively, almost idiotically wrong.

Also of note is that none of the dissenters hold permanent governor’s seats on the Fed but rather were regional bank presidents. On the other hand, three members of the FOMC saw no rate rise this year.

We have to point out that this is all a silly tempest in a teapot. Right now the target rate is between 0.25 and 0.50. Effectively it is at 0.40. A quarter point raise would, obviously, raise the rate to 0.65. Can you hear the snoring?

If a rate of 0.65 seriously dents the American economy, we have much bigger problems.

In another quarter of the global economy, markets seemed enthusiastic by the Bank of Japan’s stimulus, which amounts to more paper buybacks and a pledge to keep rates lower for longer to generate inflation. The Nikkei rose almost 2.00%, one of its best days in recent memory.

The central bank of Japan also committed to an overshoot of its elusive 2% inflation target, while maintaining its negative-0.1% interest rate level.

So, here in the U.S. we have paranoiacs who think anything even approaching a 2% inflation rate is dangerous versus the Japanese, who probably appreciate disinflation better than we do in the U.S., who are looking to exceed that paltry, miserly inflation rate.

Even as markets awaited the Fed’s post-meeting statement, oil affected markets as the EIA said U.S. inventories fell a whopping 6.2 million barrels. That sent West Texas Intermediate soaring about 2.50% and Brent North Sea 2.00%.

There is a large “but” in the drop, however. We are entering the season of the winter blend. That means gasoline stocks on hand will dwindle to make way for the ethanol hybrid fuel. In fact, gasoline inventories did fall sharply according to data released today – 3.2 million barrels versus a predicted drop of 567,000 barrels.

There is also rising expectation that OPEC and non-OPEC producers will reach a freeze agreement, but the reaction to that is a school-child’s reaction. So what? We are already in oversupply mode and the U.S. is nowhere near capacity.

With the Fed standing pat, other expected results ensued. The 10-year bond yield was off modestly and the dollar was down against the basket of major currencies.

Wishing you as always, good trading,