What are these Fed officials doing?  They’re putting into question the credibility of the institution because they sound like idiots.  – a good friend/colleague of Investment Research Dynamics

It’s becoming a farce of epic proportions, especially when there’s an entire month between FOMC meetings.  Starting this past Tuesday the typical Fed officials began their monthly cyclical cant of rate hike threats.  For some reason the stock and paper derivative precious metals markets always take a beating when the “threat” of a rate hike at the next meeting is floated.

On Tuesday one official stated that June was a meeting at which action could be taken but that it was too early based on Q2 data “to draw a conclusion.”  Another official, SF Fed Prez, John Williams, threatened that “June was a live meeting.”  Both officials gave themselves an “out” by saying that a rate hike depends on the data.

Today Bill Dudley, the ex-Goldman Sachs criminal who’s in charge of the NY Fed, also used the phrase, “June is a live meeting.”  Can anyone tell me what this means?  Does this mean that all the other FOMC meetings prior to June’s were fake?  Is the term “live” going to become “Fed-speak” for “a rate hike will be discussed at the next meeting but we may or may not raise rates?….I’m telling you, people, this next meeting is going to be a live one so you better watch out…”

Here’s an interesting question that no one has thought of to ask:   The Fed has implemented interest rate changes between meetings.  It’s rare but it’s happened.  If these Fed officials are serious about raising rates, why not do it now?   Why torture the market with series of empty threats?   If unemployment is really only 5% and inflation is at the Fed’s target rate – see this speech Stanley Fisher today:  LINK – then raise rates now.   At 25 basis points per hike,  it would take 13 rate hikes to raise the Fed Funds up to China’s overnight bank lending rate.

If the Fed raises rates even just 25 basis points, it risks derailing the smoldering level of economic activity that remains from the QE/money printing program.   Currently there’s still a pool of renters out there who can buy a low-priced home or apartment with a monthly mortgage nut including real estate taxes that is about the same as their rent payments.

What’s not being fully disclosed by the banks/Fannie Mae/Freddie Mac etc is that many of the mortgages these people receive are being underwritten with no cash-out-pocket down payment.  True debt to income ratios are exploding and the ratio of the monthly mortgage payment to monthly after-tax income is well over 50%.   These are extreme sub-prime mortgages with a heavy application of cosmetics on the facade.  Even a 25 basis point increase in the Fed funds rate would translate into an increase in mortgage rates that would disrupt this portion of the current housing bubble.

While the Fed might be able to prevent the stock market from plummeting, if it follows through on its rate hike threats, it would be unable to prevent the plunge in economic activity that is dependent on near-zero bank funding rates.

“Gold Thrives On Rate-Hike Cycles”

Several of my Mining Stock Journal subscribers have asked what I think will happen if the Fed raises rates.   It may seem counter-intuitive, but there have been several periods in which gold moved higher during rate-hike cycles by the Fed.  Rather than spend time re-inventing the wheel of evidence,  I found a detailed statistical analysis by Adam Hamilton (Zeal Speculation and Investment Newsletter) which proves this point.  Hamilton tends to be quite verbose, so here’s the Cliff Notes to his findings:

On average during the exact spans of all 11 of the Fed’s rate-hike cycles of the modern era, gold rallied 26.9% higher! That’s a serious gain during events that are supposed to slaughter gold. If I was a futures speculator heavily short gold with extreme leverage, this would terrify me.

Digging deeper, the hard historical data proves Fed-rate-hike cycles are even more bullish for gold. The majority 6 of these 11 cycles have seen gold gains averaging a staggering 61.0%! Gold is more likely to rally big during a Fed-rate-hike cycle than fall, contrary to speculators’ self-fueled delusion today.  You can read the entire here:  Gold Thrives On Rate Hike Cycles.

The bottom line for me is, if the Fed wants to raise interest rates, I say “Bring It On.”