By the time the US Federal Reserve Bank met this earlier this week all expectations of a rate hike had long since evaporated. It was of course the awful jobs report published earlier this month which was the trigger for markets to discount any chance of the Fed moving in June, and it is true that a self-professed data-dependent Fed had little choice but to hold rates unchanged. Janet Yellen, true to form, tried to use external events as an excuse in order not to emphasise the fact that the US economy is in less than perfect shape; this time it was the risk of Brexit which was highlighted.
But all this merely masks the fact that it is obvious that the Fed at no point had any intention of raising rates this month. We continue to believe that they are not going to raise at all this year, and that in fact the next move in rates is more likely to be down rather than up. The US economic picture is nowhere near as rosy as President Obama would like us to believe, as he and his administration spends their last months in office attempting to secure their legacy. And it is simply not believable that the Fed doesn’t know this. Job market data, which so spectacularly collapsed this month, were pretty much the only economic indicators which point towards an expanding economy. Surely they must know that the American economy never made a real recovery from the Great Recession and that the stimulus induced bounce-back is fizzling out.
Granted, the Fed may back themselves into a corner – like they did back in December – where their game of pretending to be just about to raise rates but find last minute excuses not to do it anyway doesn’t work anymore, and they are left with a choice of either hiking or admitting that they are not going to do it at all. And 25 or 50bps will do only limited real harm, especially if they are quickly reversed – although the effect on asset markets could be violent, as it was after the December hike. The Fed only has to play this game until December anyway, once Hillary is safely installed in the White House they can stop pretending and get back to trying to save the asset bubble they have been blowing up over the last decade. Because that really is the one thing that is absolutely certain. The Fed may just end up raising rates once or twice before they inevitably revert to a stimulus programme, but there is no way they will ever raise rates back to where they should be – because that level of interest rates is simply not consistent with the levels of debt in the American economy. Housing, cars, households in general, and most importantly of course, the Government: they are all indebted to their eyeballs and have no way of surviving a normalisation of interest rates.
That is the grim reality: that things simply can’t end well. The laws of economics won’t allow it. And it is of course not just in the US that the situation is this dire. All western economies, bar a select few, are similarly positioned on the precipice of a drop into the unknown. It is not a question of if, but when, we will face the consequences of decades of financial mismanagement.