The Fed’s Loose Lips Helping To Swamp Economic Ship

James Bullard, had of the St. Louis Federal Reserve Bank and a voting member of the Federal Open Market Committee felt a compulsion to comment on the decisions that he agreed with just last week. Correct us if we’re wrong, but it seems that this contradictory posturing by many Fed presidents, voting and non-voting, is cause for alarm because it creates volatility born of second-guessing.

Bullard seemed to stress that should the U.S. economy stay on the same course as it has since the beginning of this year, the Fed should raise rates, possibly as soon as April.

Historically, Bullard is on record as stating that inflation is more of a danger to the economy than disinflation. One can argue that point till crude oil prices get back to normal but Bullard’s comments seemed to smack of ideology and not pragmatism.

Perhaps he’s reading different charts than we are but the Bureau of Labor Statistics data tells us that thus far in 2016 the rate of inflation is 1.20%. As a refresher, here are the inflation rates from 2012 through 2015: 1.7%; 1.5%; 0.80% and 0.70%.

If any of those numbers appear to be close to the Fed’s target of 2.00% inflation, please tell us. (Yes, we know the Fed uses some arcane measures that exclude this or that from the usual measure, but the Consumer Price Index is pretty much a universal.

February’s annualized inflation gauge was 1.00%. So, what other reason would Bullard have to discuss an interest-rate rise just now except for ideological leanings?

As if to underscore this downward pressure on prices, crude oil fell again, its third straight day of losses. Significantly, West Texas Intermediate is trading below $40 again while Brent North Sea oil is hovering above the magical $40 mark. (We went into some of the reasons oil is falling again in yesterday’s fundamentals letter.)

Oil dragged equities down, although they are off their lows in mid afternoon. In fact, trading in New York is the best of the worst declines. The Dow and NASDAQ are trying to eke out some gains.

European indexes were all solidly down, ranging from minus 1.5% (FTSE/London) to minus 2.13% (CAC/Paris). Shanghai was Asia’s biggest loser, down 1.62%.

Gold is down $3.00 per ounce, a move about which nothing fundamental can really be discerned, except that there is a slight move away from haven plays even though equities struggled today.

The U.S. dollar is up against major currencies, most notably against the yen and Swiss franc, key haven currencies. The greenback is also up against the euro, which is keeping a lid on gold and other precious metal pricing, and on crude price levels as well. (In after hours trading the dollar fell slightly against the yen, but again, nothing can be distinguished excevpt the usual push and pull of trading.)

Finally, U.S. and European markets are closed tomorrow, a holiday/holy day that will certainly subdue action. We believe that some of the depressive sentiment in equities is attributable to the three-day weekend.

When we wake up on Monday, there will only be a few more days remaining in the trading month. Then will come an onslaught of data regarding economic performance in March. 

Wishing you as always, good trading,