Date: March 18, 2015

Fed Trend Says UP, But They are Nuts to Raise Rates

Today ends the Federal Reserve Open Market Committee’s two day meeting where no action is expected to take place. Computer algorithms will be set to trade on any non-mention of the word “patience” or actual mention of the same word. Isn’t technology great?!?!

As you know, I have done a fair amount of research of Fed statement days and the trend for today is plus or minus -.50% in the S&P 500 until 2 pm and then a rally into the close. This has a 74% chance of occurring, in other words, it’s good data mining. Should stocks close higher today, there is another trend that calls for a down day tomorrow with 65% accuracy.

My own take is that Janet Yellen and the Fed are out of their minds to consider raising rate this year. The dollar soaring is a quasi right hike. Oil collapsing will create some headline deflation and cover to do nothing until it begins to recover and impacts future headline inflation. Growth in Europe is teetering on recession. China continues to downgrade their economy and Japan is, well, Japan.

Aside from trying to normalize monetary policy, which doesn’t have to be now, or provide some future ammunition to cut rates, there is absolutely no need to raise rates. And should the Fed need to cut rates in 2017 or 2018, they have already shown the creativity to make that happen with rates at 0%. Remember, it was Janet Yellen herself who indicated that short-term interest rates should have been -6% in the darkest days. That was essentially accomplished through a variety of outside the box tools including quantitative easing where the Fed bought treasury bonds and mortgage backed securities with created money.

I know my view of our economy and monetary policy has been anything but mainstream since I first forecast a $5 trillion Fed balance sheet on CNBC’s Squawk Box in 2010. This recovery is the epitome of a post-financial crisis recovery, which teases and tantalizes on the upside but never reaches escape velocity. There’s nothing permanently wrong or broken. Looking at history, it typically takes two recessions to return to normal or trend GDP growth. The Great Recession of 2007-2009 was the first and there is one more, probably mild, recession over the next few years.

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Paul Schatz, President, Heritage Capital