Withdrawal Symptoms

Fed policymaker Jeffrey Lacker actually believes that some rate tightening will (or should) likely come before the end of 2014 and he once again dissented at yesterday’s rate setting meeting. We do not need too many reminders of the fact that a Fed pledge does not equate a promise in the classical, aside perhaps from what a dictionary might imply. A Fed pledge ought to be thought of as a flexible, best-guess-based aim that comes with a fine-print disclaimer which includes the keywords “subject to change.”

However, now, and unless major negative US (or perhaps foreign) economic developments take the Fed by complete surprise in coming months, the odds of any further accommodation are beginning to shrink the closer we get to election time. A fresh round of Fed-provided stimulus shortly before the voters hit the polling stations in November would be seen as having clear political overtones and it would not therefore be very beneficial to the Obama reelection campaign. Thus, unless the previously mentioned “sterilized” bond purchase program is launched at the next FOMC gathering, we might just have to get used to the idea of no more gifts from Uncle Ben & Co.

Certainly, after the consensus among polled economists is showing that the next reading on inflation could come in at as high a level as an annualized 6% level for February, the only type of QE that the Fed would be willing to embark upon (and again only if economic conditions suddenly nosedive out of the blue) would be an inflation-neutral one. It may well come in the months ahead, but consider that it could actually be US dollar-beneficial (!). Already, spiking crude oil prices (thank you, specs) have engendered an unwelcome 0.4% rise in US import prices for February. It is worth noting that the increase in import prices was lower than had been anticipated by economists and that while oil did rise, the US also experienced the largest drop – (3%) in imported food costs in three years.

However, at the end of the day, the very question of whether or not any further easing might make any difference to the economy also has to be factored in. Several schools of monetary policy thought do not believe that “more of the same” would help matters much, if at all, for the US economy given its current rate of positive progress. Consider the latest report from staffing firm ManpowerGroup; it has found that American firms’ hiring plans are running along at the strongest clip since 2008. Or, you might consider the fact that a key missing element in the economic recovery’s profile thus far – the US housing market – shows signs that it could regain its lost footing as early as next year if not sooner.

On the other hand, the Canadian real estate market is now apparently displaying most of the signs that eventually resulted in the American one souring and then some (price declines on the order of 34% since 2006). The doubling of prices during the past ten years, the 41% and 29% jumps in British Columbia’s and Ontario’s home prices in recent years, and the rise in household debt as a percentage of disposable income (to 153% last year!) have all given rise to fears that the Great White North might be the next domino at risk of tipping over on the global list of severely overheated real estate markets. Here are some famous last words, last heard in the US, circa 2005:

“We see housing market slowing down, but we don’t believe there’s a bubble in Canadian market right now.” – Benoit Durocher, senior economist at Desjardins.

Meanwhile, back in the US of A, something else that is regaining its previously (almost totally) lost footing is the much-maligned US banking sector. Remember when we were all bombarded with dire forecasts of a chain-reaction of imminent bank failures and the collapse of the American financial system? Why, it was just…last week (according to this writer’s special e-mail inbox dedicated to receiving only financial newsletters).

Well, according to the latest Fed-conducted US bank stress tests, the reality is that 78% of such institutions would be capable of maintaining adequate capital levels even in the event a really bad economic crisis (of the type often described in the aforementioned newsletters – complete with 13% unemployment and a 50% drop in stock values) were to now hit in America. Obviously, for a niche that was in bed at the ICU not that long ago, this is very good news. PIMCO spokesman Mohamed El-Erian characterized the stress test results as "credible." Doomsday newsletters will surely add the “in-“prefix to that word in a hurry. We say: “Look at the Figures” and see for yourself. Score: 15 out of 19 survive. 

Until Friday,

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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