FOMC Statement – November 2, 2016

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy.  As expected, the committee did not change the federal funds target rate, which is currently between 0.25% and 0.5%.  There were two dissenting votes, as the dissenters favored raising the target rate by a quarter of a percent.

There was almost no chance that the Fed was going to change its target rate, which hasn’t moved since its one hike in December of last year.  With the election happening next week, there was no possibility the Fed was going to rile up the markets this week.

When you read the statement, things sound rosy overall.  But if things are rosy, then why isn’t the Fed hiking its target rate?  Its only excuse right now is that growth was a little weaker than expected in the first half of the year and inflation (by its definition) is running below its 2 percent target.

The Fed is in no hurry to hike its target rate, which at this point, is really just the interest rate the Fed pays on bank reserves.  Since the banks have massive excess reserves built up from QE1, QE2, and QE3, they have little need for overnight borrowing.

The Fed is not about to sell off trillions of dollars in assets in order to drain its balance sheet in order to hike rates.  This would send the economy into a deep depression.

When the Fed hiked its target rate by one quarter of a percent last December, stocks had a terrible January.  I think Fed officials are scared of what might happen with the next one.  Maybe we will find out in December, but that is far from certain.

In a free society, there would be no central bank with monopoly powers over the money supply.  But given our current-day realities, the Fed is the biggest driver of the U.S. economy.  Money makes up half of virtually every transaction in the economy.  When the Fed tampers with the money supply and interest rates, it has a great impact.

Meanwhile, it is elections, especially presidential elections, that get all of the coverage.  The president really doesn’t have that much of an impact on the stock market, or even that much on the economy.  The president could have a great impact if he vetoed spending bills and drastically scaled back the military adventures overseas.  If government spending were to actually decrease significantly, this would have a positive long-term impact on the economy.

But if you look back at 2012, it really wouldn’t have made much difference if Mitt Romney had been elected instead of Obama.  The budget today would likely be about the same.

This month may be an exception to the general rule.  I think the election will have a bigger short-term impact on stocks and other financial markets than what we got out of the Fed.  I don’t know how much difference it will make in the long term, but there are likely to be some short-term gyrations in the markets based on the election results.

The FOMC will release its next policy statement on December 14.  That will be a bigger event than its November meeting.

Prior to that though, there is another important vote that may stir up the markets.  On December 4, Italians will vote on a constitutional referendum.  It is not clear, but this could potentially have a great impact on the banking system, especially with Italian banks showing major signs of distress.

The rest of 2016 will not lack excitement both politically and financially.  I am looking for gold to benefit in the short term due to the uncertainty.