From Cumberland Advisors’ Bob Eisenbeis comes some good analysis of this week’s Fed minutes, and its announcement that it wouldn’t be selling MBS until after its first rate hike.In addition to the MBS sale timing, he notes the last time the Fed hiked rates since it started publishing minutes was in 1994, after a considerable period of very solid growth numbers. Plus, Eisenbeis argues, the Fed has come up with tools to stave off inflation beyond just rate hikes:
Putting this all together, there are a number of factors that indicate that the Fed’s exit strategy won’t begin for some time. First, the real economy, while recovering, is still not fully recovered, nor is there an indication that we are on a path typical of most recoveries. Second, and more importantly, the jobs situation and unemployment rate are at levels where a sudden rise in interest rates might risk choking off the expansion. Third, there are no pending signs of inflation that might justify moving rates. Fourth, market uncertainties remain large and are unlikely to settle down until the problems in Europe show signs of being resolved. Fifth, we are about to embark upon an election season, the public is angry at Washington in general, and the new appointees to the Board of Governors are unlikely to support preemptive interest-rate increases until after the election. Sixth, while the FOMC may have settled upon most likely strategies to shrink its balance sheet and tactics to temporarily idle excess bank reserves, the plans have not been finalised and they are likely to take some time to implement, should the FOMC decide to pursue a gradual change in the language of the statement, to prepare markets for a move, and finally to implement a gradual increase in interest rates. Lastly, while strategies and tactics have been identified, the issue of timing or the trigger events have not been made public.
All of these factors suggest that rates are likely to remain low through the end of this year and well into next year. This may bode well for equities and other risk assets, notwithstanding the recent correction that has hit the markets.
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