· The release of last month’s FOMC minutes “suggest” a desire to start tapering sometime in the next few meetings.
· This has caused the 10yr to trade from about 2.70% to 2.795%.
· Let’s keep in mind that these FOMC minutes are from a month ago. A few things have happened since.
· Unemployment ticked up from 7.2% to 7.3%. The wrong direction.
· The labor force participation rate TANKED from 63.2% to 62.8%, now the lowest since 1978. Please keep in mind Bernanke and Yellen have often mentioned that the 6.5% target for unemployment is NOT a “trigger”, it’s a general level, and this level will also be measured on its “quality”. A tanking participation rate does not bode well for quality.
· It’s becoming more clear every day that Obamacare is going to increase the costs of carrying health care insurance, a TAX, more than most people thought. Not a political statement at all. Just a truth and it must be viewed as a tax.
· ALSO, during this past month, not only has the ECB put in a surprise rate cut in, it is now talking outwardly about the possibility of a negative funds rate to apparently “force” lending. Which is ridiculous, we all know this will just again increase the bubbles in stocks and bonds. But “if” Europe has turned a corner as the media constantly pontificates, why would they be taking these steps? Could it be that Europe has NOT turned any corner, and more likely is making a turn for the worse. I believe so.
· So, with all that said. I do not believe the Fed will be tapering in the next few months.
· And to put myself out on a limb, I believe there is a 50/50 chance that the next Fed move will be to actually increase its asset purchases.
· Now, there is the potential for two caveats to this theory. First, and this is a stretch, “if” the Fed wanted to “test” a taper to truly see what the immediate and longer lasting effects would be, this could be a good time to try. They could try it under Bernanke, and undo the taper under Yellen if it’s more severe than they thought. I could not seeing a reverse being done under one chairman, but doing it with a new chairman I could see. The second caveat were comments in the FOMC meetings about “other” things they could do. They don’t way what these are, they just say they could try “other things”. Now that could those things be? You may recall my crazy prediction of the past several years! I’ve predicted the Fed could come in a “directly” fund 50yr amortizing 2% home loans to ANYONE who wanted it. Think for a moment how incredibly stimulating that would be. Not only lower interest costs to all homeowners, but also lowering the monthly amortizing principal payment. That would IMMEDIATELY give consumers money to SPEND! I know it sounds nuts, but in my opinion this is very precisely what was done during the 30’s, ultimately resulting in the creating of Fannie Mae in 1937.
· Also, If you care to, attached is a speech Yellen gave in June 2012, where near the end she makes it VERY clear that if more monetary easing was needed, she would have no problem increasing the asset purchases.
· For my last thought, I will leave you with this. Both in the FOMC minutes and in a speech Bernanke gave last night, attached, the Fed is now trying to communicate that rates will not be raised for even longer than they have been saying. In the FOMC minutes they say this will be an effective tool. And last night Bernanke explained that even if the inflation targets are meet, and even if 6.5% unemployment (and I’m assuming quality as well) are met, rates WILL not be raised for a significant time after.
· So as I’ve been saying for the past 5yrs, the Fed will not be raising rates for a very long time. I might say 5 to 10yrs, for no other reason than 15 to 20yrs makes me sounds nuts. But that’s what I believe.
Randy Woodward
Managing Director, Fixed Income Capital Markets
One Burton Hills Blvd, Ste 225, Nashville, TN 37205
( Toll-Free 800.764.7621
6 Mobile 615.969.2682
Randy.Woodward@RaymondJames.com
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