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By HaleStewart September 17, 2015 9:02 am
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The Most Meaningless Rate Hike In History

     I would be a rich man if I had a penny for every letter written about the upcoming Federal Reserve decision.  To hear analysts discuss it, you’d think the fate of the free world as we know it rests on every word and phrase the Fed will utter in its decision.

     Let me offer a different view: this is, without a doubt, the most meaningless Federal Reserve rate hike in history.  Why?  Let’s assume the Fed raises 25 basis points.  Is this the beginning of a long series of rate hikes or a “one and done” scenario?  The answer is clearly the latter. 

     First, there is no inflation in the system.  None.  Producer and consumer prices are weak at best:

Commodities are in a bear market and wage growth is paltry.  So the Fed isn’t raising rates to counter inflation.

     While the US economy is growing, the pace of growth is less than impressive:

The Fred chart above shows the Y/Y percentage change in GDP, which is the weakest expansion since 1950.  So the Fed doesn’t want to stop any forward progress the economy might make.  This clearly places an upper limit on their rate hike agenda.

     The dollar is strong relative to other currencies, a fact that is already negatively impacting industrial production.  The anecdotal comments in the monthly ISM readings have specifically mentioned dollar strength as a short-term economic headwind. 

     And the international environment is weak.  China is clearly slowing, which is sending negative ripple effects out into the “south-south” trade, negatively impacting the economies of every natural resource producer on the planet.

     In theory, the Fed should look only at the domestic environment when setting rates, to keep in line with their dual mandate.  But considering the US economy’s importance and the increasing inter-locking nature of the world economy, it’s difficult to see the Fed not analyzing their move from an international perspective in at least a small degree.

     But even if they only focus on the US, there is clearly only one policy option; a “one and done” scenario.   There is no inflation to stop and they don't want to hit the brakes of an economy that is already growing slowly.  If they raise, they will raise by 25 basis points simply to prove they can.  This is not a “return to normal.”  Instead, it’s the Fed with a very itchy trigger finger.    

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