As Predicted, Fed Leaves Rates Unchanged In Face Of Global Economic Concerns

The statement issued by the Federal Open Market Committee touched upon a small handful of reasons it voted to hold rates steady. We highlight some of them below in bold.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. Recent global economic and financial developments may restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term. Nonetheless, the Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators continuing to move toward levels the Committee judges consistent with its dual mandate. The Committee continues to see the risks to the outlook for economic activity and the labor market as nearly balanced but is monitoring developments abroad. Inflation is anticipated to remain near its recent low level in the near term but the Committee expects inflation to rise gradually toward 2 percent over the medium term as the labor market improves further and the transitory effects of declines in energy and import prices dissipate. The Committee continues to monitor inflation developments closely.

To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.

There are a few more paragraphs in the Fed statement, which you can read here: http://www.federalreserve.gov/newsevents/press/monetary/20150917a.htm

You will note that the chief concern – call it a worry – is the condition of economies outside the U.S. and North America. We can interpret most of that concern as referring to China and East Asia and Oceania in general.

That is not to say that Europe, (especially Eastern Europe), Brazil, Russia and economic challenges in the Middle East and India are not on the Fed’s radar. We feel as if the bow that ties up the “international developments” box is a worry that a rise in U.S. rates would pulverize emerging economies, which are already in precarious positions regarding over-borrowing at unaffordable rates. 

We also firmly believe that the biggest challenge to U.S. inflation targets is a stronger dollar, which would only further serve to keep import prices down, particularly affecting the cost of crude oil and a handful of other commodities. A higher dollar would also naturally help to make American goods and services more expensive abroad, helping to depress not just U.S. prices but world prices.

We don’t believe we are completely free of a long-standing global pattern of next to zero inflation or even disinflation.

Almost in the real of trivia, it should be noted that there was one dissent in today’s vote to keep rates unchanged. It came from Jeffrey Lacker, a noted rate hawk and anti-interventionist, who is the president of the Richmond Federal Reserve Bank.

Today we will hold off on discussing how this decision is going to affect various markets because the movers and shakers are still digesting the Fed release. Our initial hunch is that most markets will hold the status quo with perhaps the greenback losing some value, helping dollar-denominated international commodities a bit.

We think it will also mean a return to more fundamental fundamentals and a veering away from event-driven fundamental market news.

A Long Note about Oil Because It’s More Important In The Long Run Than Interest Rates

Why lead with this today when everyone is scrutinizing the FOMC statement? Because we wanted to make clear that outcomes are never what we think they will be. The universe itself may be relativistic, but if possible, the world of finance on planet Earth is even more relativistic.

In conflicting outlook assessments today, Goldman Sachs and OPEC offered two different visions of where the price of crude is headed.

Goldman says we are looking at least 15 years of low oil prices, a period during which the commodity will see a range from $20 to $50. The $20 call seems a bit dramatic, although not out of the realm of possibility.

The $50 top is more intriguing, particularly since OPEC is calling for $80 oil by 2020. So, we have a longer window for lower prices from the world’s leading investment bank and a shorter window and higher prices from the cartel that more or less calls the oil game as it sees fit.

We think in 15 years, we will see oil and most fossil fuels in a much steeper decline as an energy category. Cheap fuel in the form of oil will just get cheaper as more and more forms of energy appear and are cleaner and more reliable, unsusceptible to international politics and market intrigues.

Wishing you as always, good trading,