Critical Observer

FEDERAL RESERVE KEEPS INTEREST RATE AT 0%

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The Federal Reserve is keeping U.S. interest rates at record lows in the face of threats from a weak global economy, persistently low inflation and unstable financial markets. 
 
Ending a highly anticipated meeting, Fed officials said Thursday that while the U.S. job market is solid, global pressures may "restrain economic activity" and further drag down already low inflation. 
 
Signs of a sharp slowdown in China have intensified fear among investors about the U.S. and global economy. And low oil prices and a high-priced dollar have kept inflation undesirably low. 
 
Before year's end, many analysts still expect the Fed to raise its key short-term rate, which it's kept near zero since 2008. A higher Fed rate would eventually send rates up on many consumer and business loans. 
 
"All this really does is punt," said Scott Clemons, chief investment strategist for Brown Brothers Harriman's private banking business. 
 
Clemons said he expects the Fed to raise rates before the end of the year, especially if concern in the financial markets about China's economic prospects eases. 
 
"The Fed is paying attention to what is going on abroad," he said. "That's all code for China." 
 
Stock prices barely moved after the Fed's decision was announced at 2 p.m. Eastern time. But bond prices rose, and yields fell. 
 
Financial markets had been zigzagging with anxiety as investors tried to divine whether the Fed would start phasing out the period of extraordinarily low borrowing rates it launched at a time of crisis. 
 
The Fed's action Thursday was approved on a 9-1 vote, with Jeffrey Lacker casting the first dissenting vote this year. Lacker, president of the Fed's Atlanta regional bank, had pushed for the Fed to begin raising rates by moving the federal funds rate up by a quarter-point. 
 
Instead, the Fed retained language it has been using that it will be appropriate to raise interest rates when it sees "some further improvement in the labor market" and is "reasonably confident" that inflation will move back to the Fed's optimal inflation target of 2 percent. 
 
The Fed's preferred measure of inflation was up just 1.2 percent in the latest reading and has been below 2 percent for more than three years. 
 
In an updated economic forecast, 13 of the 17 Fed policymakers said they see the first rate hike occurring this year. In June, 15 Fed officials predicted that the first rate hike would occur this year. The forecast also reduced the number of rate hikes this year to show an expectation of just one quarter-point increase, rather than two that had been the expectation at the June meeting. 
 
The new forecast significantly lowered the expectation for inflation this year to show the Fed's preferred inflation gauge rising just 0.4 percent, down from a 0.7 percent forecast in June. The change takes into account the further rise in the value of the dollar, which makes imports cheaper, and a recent drop in oil prices. The Fed's forecast still foresees inflation accelerating to a 1.7 percent increase next year, still below its 2 percent target. 
 
The new forecast has unemployment dropping to 5 percent by the end of this year, down from 5.3 percent in June. The unemployment rate in August dropped to a seven-year low of 5.1 percent. 
 
Before Thursday's decision, some economists argued that many factors - from a sharply slowing China to the tumult in markets to persistently less-than-optimal inflation - raised concerns about a rate hike. Others contended that with the U.S. job market considered essentially recovered from the Great Recession, it was time to start edging toward normal rates. 
 
The anxiety that gripped investors stemmed in part from concern that once the Fed starts raising its key rate, other rates - for mortgages, car loans, business borrowing - will eventually rise. Some fear the economy might suffer. 
 
Yet the Fed's influence on many consumer and business rates is only indirect. In the short run at least, those rates could continue to stay low, held down by low inflation globally and by a flow of money into U.S Treasurys. 
 
Fed officials have stressed that once the central bank starts raising rates, the process will be extremely gradual. The Fed might pause for months after its first hike and assess the consequences before proceeding further. Still, economists generally say the effects of a series of small rate hikes will be negligible. 
 
Until turmoil struck markets this summer, a September rate hike seemed a lock. Then, China's surprise decision to devalue its currency ignited fears that the world's second-largest economy was weakening faster than assumed. Stocks tumbled. 
 
At an economic conference last month in Jackson Hole, Wyoming, Fed officials sent mixed signals about this week's meeting. Some indicated they were ready to raise rates if markets had settled and if the economy kept improving. 
 
In July, when Yellen delivered an economic report to Congress, she reiterated that the Fed would likely raise rates before year's end. But she wasn't specific.

FEDERAL RESERVE KEEPS INTEREST RATE AT 0%

The Federal Reserve is keeping U.S. interest rates at record lows in the face of threats from a weak global economy, persistently low inf...

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GOLD REPATRIATION CRISIS AT THE FEDERAL RESERVE; ECONOMY IN CRISIS

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The London Metal Exchange (LME) is severely lacking gold reserves, as recently China and India have been actively buying gold, financial analysts said. As a result, these days gold is high in demand. 
 
The US Federal Reserve, the world’s largest depository of gold, has seen growing numbers of requests to repatriate gold from European nations. 
 
Now, the gold reserve in the Fed has reached a record low over the last 30 years. 
 
In periods of crisis, world powers usually support their economies and national currencies with the purchase of gold reserves. That helps to cut the country’s reliability on the dollar as gold remains one of the most reliable assets in the market. 
 
Currently, due to the global economic slowdown, countries are making efforts to repatriate their gold from the Federal Reserve. 
 
For instance, over the last year nearly 250 tons of gold have been taken from the US depository. 
In order to support growth, the Netherlands repatriated 120 tons of gold, 20 percent of its reserve reserves. France and Germany also took back a large amount if their gold reserves. 
 
According to financial experts, the US economy is currently under great stress. 
 
In addition, it was reported that the US had allegedly sold a large amount of its gold reserves. Currently, the Federal Reserve stores 530,000 gold bars, and the US owns only 34,000 of them. 
The more gold countries demand from the US, the more unstable the American economy becomes, which could in turn seriously threaten the stability of the dollar, experts warned. 
 
Russia is the world’s sixth-largest holder of gold reserves, 1,200 tons. Over the last five years, Russia has increased its gold reserves by nearly 80 percent. In the long run this could guarantee the stability of ruble. 
 
From Sputnik News

GOLD REPATRIATION CRISIS AT THE FEDERAL RESERVE; ECONOMY IN CRISIS

The London Metal Exchange (LME) is severely lacking gold reserves, as recently China and India have been actively buying gold, financial ...

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RAISING THE INTEREST RATE MAY TRIGGER GLOBAL DEBT CRISIS

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Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to monetary tightening by the US Federal Reserve, the world’s top financial watchdog has warned. 
 
<h3>
My Comment:  I would say it's a safe bet that the FED will NOT be raising interest rates in the very near future. The FED just wants to make it look like they are ABLE to raise them, and that the market is healthy enough to do so. But in reality, it's just for show. There is no way that raising the interest rates now is realistic. As many reliable economists have pointed out, it can't be done right now without collapsing the market.</h3>
The Bank for International Settlements said the wild market ructions of recent weeks and capital outflows from China are warning signs that the massive build-up in credit is coming back to haunt, compounded by worries that policymakers may be struggling to control events. 
 
“We are not seeing isolated tremors, but the release of pressure that has gradually accumulated over the years along major fault lines,” said Claudio Borio, the bank’s chief economist. 
 
The Swiss-based BIS said total debt ratios are now significantly higher than they were at the peak of the last credit cycle in 2007, just before the onset of global financial crisis. 
 
 
<a href="http://www.telegraph.co.uk/finance/economics/11858952/BIS-fears-emerging-market-maelstrom-as-Fed-tightens.html" target="_blank">Read The Full Article ></a>

RAISING THE INTEREST RATE MAY TRIGGER GLOBAL DEBT CRISIS

Debt ratios have reached extreme levels across all major regions of the global economy, leaving the financial system acutely vulnerable to...

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Is The Federal Reserve Bank to blame for market crisis or is China?

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As stock markets continue their slide into negative territory, economists debate whether the problems lie in monetary mismanagement by the US Federal Reserve or with China’s domestic concerns “exporting pain” to others via its yuan devaluation. 
 
Speaking to RT, economist Peter Schiff of Euro Pacific Capital Inc. said that there is a lot of “scapegoating” surrounding China and the yuan’s devaluation when it comes to the recent downward fortunes of global stock markets, but that the Federal Reserve is the more responsible culprit when it comes to any instability in the American economy. 
 
“This is not about China. This problem is made in America. It’s all about the Fed. The Fed inflated this bubble and now they’re threatening to prick it. Everybody expects the Fed to actually raise interest rates,” Schiff said, after US stocks rallied early Tuesday before crashing in the final hour of trading. 
 
He went on to say that he believes the possibility of the Fed raising rates is “a bluff,” and that doing so would trigger another financial crisis. 
 
“If the Fed takes away the zero percent interest rates, this market is going to implode and we’re right back at recession… that is what is hurting markets around the world,” Schiff said. “It’s the fear of higher interest rates. That’s propping up the dollar, that’s depressing emerging markets, that’s depressing commodity markets.” 
 
 
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Critics of Schiff’s view claim the Fed isn’t to blame and that, in fact, the US government has not done enough to help boost the economy. 
 
“The problem is that this has been a very weak recovery for the United States,” Mark Weisbrot from the Center for Economic and Policy Research told RT. “Our GDP is about 8.5 percent bigger than it was at the peak before the Great Recession,” he said, adding that this statistic represents very little growth. 
 
By comparison, he said, China has grown by 80 percent and Europe has just recently caught up to its pre-recession peak. Specifically, Weisbrot singled out the European economy as the “much worse problem,” citing much higher unemployment rates there than in the US. 
 
He said the Fed “has done its part” by keeping interest rates low and that America needs more infrastructure investment and stimulus to create another three or four million jobs. 
 
Schiff, however, was adamant that the US hasn’t had “a real recovery.” 
 
“The reason that the average American is worse off today than when the recovery began is because the Fed hasn’t allowed a recovery,” he said, adding that measures such as zero percent interest rates are “interfering” with a true recovery. Instead, less government, higher rates and a “real recession” are needed before recovery can occur, Schiff said. 
 
This argument was challenged by Weisbrot, who said that allowing the recession to worsen wouldn’t have helped because the kinds of policies Schiff advocated for had been implemented in Europe and did not lead to better economic growth. 
 
Regarding China’s role in the market turmoil, economist Max Wolff of Manhattan Venture Partners told RT that the yuan’s devaluation is a move that suggests China is still more interested in looking inward than focusing on the global economy. 
 
“When the Chinese go for the devaluation, what they’re saying is, ‘We’re more concerned with our domestic employment and GDP picture, and we’re willing to make a good effort to export our pain to other people,’” he said. “What that means is that a leading global economy isn’t taking a leadership role; it’s really internally focused and it’s willing to export some pain in order to stabilize internally.” 
 
This could suggest the situation in China may be worse than initially thought, he added. Beijing’s move has led other nations to follow suit and devalue their currencies in order to stay competitive, Wolff said, warning that any further devaluation could risk a continuing chain reaction. 
 
At the same time, he noted that there are “real pockets of weakness” in the US economy, particularly since the bottom 75 to 80 percent of households still haven’t recovered from the 2008 crisis. “They’re not as strong as we’d like them to be going into a tough global moment,” Wolff said. 
 
From: RT News

Is The Federal Reserve Bank to blame for market crisis or is China?

As stock markets continue their slide into negative territory, economists debate whether the problems lie in monetary mismanagement by th...

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The Fed Is Spooking the Markets Not China

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Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, notching its worst weekly performance in four years. The sell-off took the Dow Jones down more than 10% from its peak valuations, thereby constituting the first official correction in four years. One third of all S&P 500 companies are already in bear market territory, having declined more than 20% from their peaks. Scarier still, the selling intensified as the week drew to a close, with the Dow losing 530 points on Friday, after falling 350 points on Thursday. The new week is even worse, with the Dow dropping almost 1,100 points near the open today before cutting its losses significantly. However, no one should expect that this selling is over. The correction may soon morph into a full-fledged bear market if the Fed makes good on its supposed intentions to raise interest rates this year. Have no illusions, while most market observers are quick to blame the sell-off on China, this market was given life by the Fed, and the Fed is the only force that will keep it alive. 
 
The Dow has now blown through the lows from October 2014, when fears over life without quantitative easing and zero percent interest rates had caused the markets to pull back about 5%. Back then when market fear began spreading, St. Louis Fed President James Bullard publically issued a few choice words which reassured the markets that the Fed stood ready to reignite the QE engines if the economy really needed a fresh dose of stimulus. By the end of the year the Dow had rallied 10%. 
 
Amid last week’s carnage, Mr. Bullard was at it once again. But instead of throwing the market a much needed life preserver, he threw it an unwanted anchor. He offered that the economy was still strong enough to warrant a rate increase in September. He was careful to say, however, that the Fed is still “data dependent” and will therefore base its decision on information that will come out over the next three weeks. So after nearly seven years of zero percent interest rates, the most momentous decision the Fed has made since the Great Recession will be dictated by a few weekly data points that have yet to emerge. Haven’t seven years of data provided them enough information already? What’s next? Will they have to check the five-day forecast to insure that there will be no rain before they pull the trigger? 
 
As I have been saying for years, the Fed has always known that the fragile economy created through stimulus might prove unable to survive even the most marginal of rate increases. But in order to instill confidence in the markets, it has pretended that it could. Wall Street has largely played along in the charade, insisting that rate increases were justified by an apparently strengthening economy and needed to restore normalcy to the financial markets. 
 
But the recovery Wall Street had anticipated never arrived, and traders who had earlier demanded that the Fed get on with the show, have now panicked that the rate hikes are about to occur in the face of a weakening economy. As a result, we are seeing a redux of the 2013 “taper tantrum” when stocks sold off when the Fed announced that it would be winding down its QE purchases of bonds. 
The question now is how much further the markets will have to fall before the Fed comes to the rescue by calling off any threatened rate increase? What else could pull the markets out of the current nose dive? 
 
Think about where we are. Stock valuations are extremely high and earnings are falling and the economy is clearly decelerating. The steady march upward in stock prices has been enabled by a wave of cheap financing and share buybacks. There are very few reasons to currently suspect that earnings, profits, and share prices will suddenly improve organically. This market is just about the Fed. After one of the longest uninterrupted bull runs in history, bearish investors have learned the hard way that they can’t fight the Fed. So why should they now expect to win when the Fed is posturing that its about to embark on a tightening cycle? 
 
If the Fed were to do what it pretends it wants to do (embark on a tightening campaign that brings rates to about 2.0% in 18 months), and in the process ignore the carnage on Wall Street, I believe we would see a consistent sell off in which most of the gains made since 2009 would be surrendered. After all, how much of those gains came from bona fide improvements in the economy? It was all about the twin props of Quantitative Easing and zero percent interest rates. The Fed has already removed one of the props, and it’s no accident that the markets have gained no ground whatsoever in the eight months since the QE program was officially wound down. 
 
As the market considers a world without the second prop, a free fall could ensue. Now that we have broken through the October 2014 lows, there is very little technical support that should come in to play. A free fall in stocks could be an existential threat to an already weak economy.  It should be clear the Janet Yellen-controlled Fed would not want to risk such a scenario. This is why I believe that if the sharp sell off in stocks continues, we will get a clear signal that rate hikes are off the table. 
Of course, even if it does throw us that bone, the Fed will pretend that the weakness was unexpected and that it does not come from within (but is caused by external forces coming from China and Europe). Using that excuse, it will attempt to prolong the bluff that its delay is just temporary. For now at least Wall Street is happy to play along with the blame China game. This ignores the fact that China has had much bigger sell offs in recent weeks that did not lead to follow-on losses on Wall Street. I think the problems in China are the same problems confronting other emerging economies, namely the fear of a Fed tightening cycle that would weaken U.S. demand, depress commodity prices while simultaneously sucking investment capital into the United States, and away from the emerging markets, as a result of higher domestic interest rates and the strengthening dollar. 
 
But if a temporary halt in rate hike rhetoric is not enough to stem the tide, a more definitive repudiation may be needed. Such an admission should finally open some eyes on Wall Street about the true nature of the economy and the unjustified strength of the U.S. dollar. That already may be happening. The dollar index closed at 95 on Friday…down from a high of 98 two weeks prior. On Monday, the index blew through the 93.50 support level and dropped more than 3% in just one day, down to intraday low of 92.6. Who knows where it stops now? 
 
Gold is rallying in the face of the crisis and has moved quickly back to $1,160, up around $80 in just two weeks. The bounce in gold must be causing extreme angst on Wall Street. Just two weeks ago, amid widening conviction that gold would fall below $1,000, it was revealed that hedge funds, for the first time, held net short positions on gold. Those trades are not working out. With the major currencies and gold now strengthening against the dollar, the greenback has had some success against far lesser rivals like the Thai baht and the Kazakhstan tenge. But these victories against currencies largely tied to commodities may be the last fights the dollar wins for a while, especially if Janet Yellen finally comes clean about the Fed’s inherent dovishness. Those currencies now falling the farthest may be the biggest gainers if the Fed shelves rate increases. 
 
Some still cling to the belief that the Fed will deliver one or two token 25 basis point rate increase before year end. But this could expose the Fed to a bigger catastrophe than doing nothing at all. If it actually raises rates, and the crisis on Wall Street intensifies, further weakening an already slowing economy, the Fed would have to quickly reverse course and cut back to zero. This would put the Fed’s cluelessness and impotency into very sharp focus. From its perspective anything is better than that. If it does nothing, and the economy continues to slow, ultimately “requiring” additional stimulus, it will at least appear that its caution was justified. 
 
Unfortunately for the Fed, it won’t be able to get away with doing nothing for too much longer. Events may soon force it to show its hand. Then perhaps some may notice that the Fed is holding absolutely nothing and has been bluffing the entire time. 
 
Written by Peter Schiff • August 24, 2015

The Fed Is Spooking the Markets Not China

Fasten your seat belts, this ride is getting interesting. Last week the Dow Jones Industrial Average was down more than 1,000 points, not...

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