FOMC and BOJ – September 21, 2016

The Federal Open Market Committee (FOMC) has released its latest statement on monetary policy.  The Federal Reserve will not raise interest rates, or more accurately, will not target a higher range for the federal funds rate.

Since the fall of 2008, when the target rate was pushed to near zero (between zero and 0.25%), the Fed has only raised its overnight borrowing rate once.  This happened in December 2015, when the target rate range was raised by one-quarter of a percent (25 basis points).

At the beginning of the year, analysts, and the market in general, were predicting that the Fed would raise its target rate 4 times in 2016.  Now that we are in September with no rate hikes, we will see one at best.

If the Fed ends up hiking by a quarter of a percent in December, it will have taken about a year from the last one.  But we don’t even know if this will happen.  Every time the “next time” comes around, there is always an excuse on why it just isn’t time yet to hike rates.

The FOMC has another meeting at the beginning of November, but there is almost no possible way we will see any major announcement from that meeting.  This is right before the election and they aren’t going to send stocks into a tailspin just days before voting.

One thing that was a little different this time around is that there were 3 dissenting votes on the committee.  I think this is a way to signal that they might actually follow through next time.  Typically, the committee votes unanimously or with one dissenting vote.

Still, a lot can happen in just under three months.  It was around this time in 2008 that things fell apart.  We know there will be a new president coming and the markets don’t like uncertainty.  There are plenty of other problems out there too that could spark a downturn.

When the FOMC made its announcement, investors were generally happy.  Almost everything went up except the dollar.  The Nasdaq is hitting new all-time nominal highs.

Therefore, should we assume that markets are going to tank if and when the Fed does hike its target rate again?

Meanwhile, the Fed wasn’t the only major central bank in action.  The Bank of Japan (BOJ) made its own announcement.  This is interesting just from the standpoint that Japan is an absolute Keynesian mess.  Japanese officials are fulfilling Paul Krugman’s dream of massive government spending, massive debt, and massive monetary inflation.

Unfortunately for the Japanese, they are stuck in a weak economy that is only being made worse through all of the interventions.  So the BOJ decided to change things up a bit, or at least give that appearance.

The BOJ says it isn’t going to focus on monetary stimulus as much, and instead will target interest rates more.  The policy now is to target the 10-year yield at a zero percent rate.  Since the 10-year yield has been negative in Japan for the last several months, I’m not sure if we should be happy that this is an improvement, or depressed that things have come to this.

The BOJ has been engaged in monetary inflation that is unprecedented for a modern, supposedly first-world, nation.  It has been buying up assets (creating money) to the tune of 80 trillion yen per year, which is almost $800 billion.  In order to achieve its objective of targeting interest rates, we shouldn’t expect this massive monetary inflation to stop.

When you compare the BOJ and the Fed, the Fed is looking pretty good these days.  Sure, the Fed approximately quintupled (five times) the monetary base from 2008 to 2014, but at least it has stopped for now.

For the BOJ, it is almost as if there is some kind of a bet going on amongst the elite, or perhaps an experiment, to see just how far they can push this outrageousness.  I know consumer price inflation has been low in Japan (probably due to major fear), but this can turn on a dime.  If people see no end in sight to the monetary inflation, trust in the currency can turn quickly, especially when looking at the extent of the monetary inflation and the government debt.

There is going to be some kind of a major global correction.  It will be global because all of the world’s major central banks have made similar errors.

Luckily for Americans, the errors seem to be less damaging at this point when compared to Japan, China, and Europe.  Still, it doesn’t mean there won’t be pain here.

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