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3/9/2015

Well what do you know….it seems that the Fed is facing an interesting conundrum.

You all saw the incredibly strong jobs numbers last week, which brought the outright unemployment rate down to a ‘close to full rate of employment level”…astonishing !! Yet for some reason monetary policy remains in a “crisis mode” having maintained a zero rate target for several years now.  What crisis mode refers to is that drastic zero policy is adopted due to crisis factors in the economy.  Can it be…an unemployment rate at 5.5% yet the economy is in a crisis state?  Something doesn’t smell right and that something refers to the fact that perhaps this overheating economy may not be able to withstand positive real interest rates. 

Can investors imagine another option to park money, in positive real interest rate bearing US securities…instead of being drawn into a high risk equity sector !!

Here’s where it gets very interesting.  Some are arguing that the Fed is way behind the curve now, with zero rates and a heating up jobs market.  The tricky part is that one of the major stimuli in creating this economic vibrancy was an ever appreciating Stock market.  Multiple rate hikes in the short term pipeline?  Why not?  and don’t play that inflation is dead argument.

Now let’s see how strong the economy really is…the true litmus test will be how it fares with 10 year yields at 5% and a funds rate at 2.5%.  Our guess…not that strong.

 

Stephan Kudyba (MBA, PhD)                      THE MARKET DOCTOR

 

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