The Federal Open Market Committee (FOMC) has released its latest statement on monetary policy.  The Federal Reserve will not be raising its target federal funds rate.

Compared to the last statement, there were a few changes in the language used in the first paragraph, but it is mostly just gibberish as usual.

There was one dissenting vote by Esther George, who wanted to raise the target rate.

Stocks ended the day mostly flat, although the Nasdaq was higher.  Gold went up, but not a lot.  The 10-year yield went down to almost the 1.5% level.  Overall, there was not a lot of market reaction.

With the Fed having so much power over the economy, things are often backwards when dealing with the financial markets.  For example, there are many times where bad economic news actually drives stocks up.  Stock investors see the bad news as a sign that the Fed will loosen (or keep loose) its monetary policy.  Therefore, they reason that it is beneficial for stocks.

Now things are starting to work the other way.  When the Fed doesn’t raise its key rate, investors start to wonder what they see that is wrong with the economy that is making them so fearful of raising it.

The official unemployment rate is now at 5.5%.  Stocks are hitting all-time highs.  There is supposed to be a recovery, albeit not as strong as previous recoveries.  If the Fed can’t raise its target rate above a half of a percent, when can it raise it?  What do Fed officials see?  What are they so worried about?

It wasn’t that long ago that the Fed was expected to raise its key rate 4 times in 2016.  Now it is questionable whether it will happen in September or December.  Will the Fed raise it at all in 2016?

The federal funds rate is not dictating monetary policy at this time.  Due to the huge pumping of money from 2008 to 2014, the huge pile of excess reserves is keeping the overnight lending rate low.  The Fed has kept a tight monetary policy since the end of QE3 in October 2014.

In order to raise the target federal funds rate, the Fed either has to sell trillions of dollars in reserves, or it has to increase the rate it pays on bank reserves.  Since the Fed isn’t going to be massively reducing its balance sheet any time soon, it is basically left with the second option.

Still, even if the Fed raises its key rate by paying banks not to lend, it is still a reflection of a tighter monetary policy on the margin.  It could mean even less bank lending than we currently have.  This has a deflationary effect.

I think the Fed officials know that the economy has been propped up by loose money.  This includes the stock market.  They are afraid of what will happen if they take on a slightly tighter stance.  The one time they raised rates (last December), stocks had a really rough ride for a little while after.

The stock market makes me really nervous right now.  It has for a while, but it is even more so now.  I don’t think the risk is worth the reward at this point, unless you are betting on specific individual stocks or specific industries.  Even there, there is danger.

Stocks are at or near an all-time nominal high right now.  Maybe the Dow will go to 20,000.  Is a possible 8% gain (less fees and taxes) really worth the risk?  That question answers itself when you consider that a recession could easily mean a 50% downturn.

Even if you just think a 15% correction is in the cards, why would you stay in for just a little bit more in potential gains?

I am an advocate of a permanent portfolio.  In this context, I think stock holdings are acceptable right now.  But beyond that, it really is speculation with a lot of risk right now.

The Fed is sitting tight right now.  Of course, doing nothing is a choice.

I keep saying that if the economy gets rough and a recession appears, the Fed is likely to start ramping up monetary inflation again.  QE4 anyone?

That will be a time to look into more speculations in precious metals and mining stocks.  I like gold and mining stocks now, but there is still a threat of a downturn that could hurt these.  For this reason, I am far from being “all in”.

In a recession, cash is still king, especially as long as inflation is not seen as a serious threat.  Right now, inflation is not seen as a threat.  That is what the bond market is telling us with these low yields.

Now we can look forward to the FOMC’s next meeting in September to see what the next excuse will be for delaying another rate hike.