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Economic Data Further Eroding Fed Credibility

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As we pointed out last week, the Federal Reserve finds itself stuck between a rock and a hard place. Well, data released last Friday made that squeeze even tighter.

Weak employment and wages have many analysts backing off expectations for aggressive action by the Federal Reserve this year. The Fed has been talking up the economy for months to justify interest rate normalization. But the actual data tells a different story. As Peter Schiff put it in his newest podcast, the most recent weak data further undermines the Fed’s credibility.

The jobs number turned out to be a huge miss. The consensus was for 185,000 news jobs created, but the actual number came in at just 138,000. The government also lowered last month’s report of 211,000 jobs created all the way down to 174,000. The unemployment number dropped to a new low of 4.3%, but that was largely a factor of more people leaving the workforce. The labor participation rate fall 0.2 percent to 62.7, matching an all-time low.

As Bloomberg reports, the weak jobs numbers have dampened expectations for interest rate hikes.

While the Federal Reserve is poised to raise interest rates at its meeting next week after increases in March and December, investors increasingly doubt the central bank’s projection for additional hikes.”

Even before the bad jobs numbers came out, Toronto-Dominion Bank’s Bart Melek was playing down the expectation of rate hikes this year, and was talking up gold.

The Fed is going to be very, very gentle in how it handles monetary policy hikes. As we move deeper into 2017, we are probably going to expect less and less aggressive actions, so chances are that the Fed will certainly hike in June, but after that, the certainty and then the rate that they’ve been talking about, may not actually materialize to the same extent. We’re fairly confident that gold should do well.”

The yellow metal was up 1% Friday after the disappointing job numbers came out.

In his podcast, Peter made a strong case that expectations the Federal Reserve will back off rate hikes is justified based simply on what Janet Yellen and other Fed members have said.

Remember in my last podcast, I pointed out that the Federal Reserve specifically, in their minutes, said that before they raise rates again, they want confirmation that the weak economic data from Q1 was transitory. Meanwhile, all of the data that has come out since those minutes were released, actually proves the opposite – that the economy is weakening. I think there is a very good chance  that Q2 is going to be weaker than Q1, which obviously means Q1 wasn’t transitory, but it was the beginning of a trend.”

Nevertheless, even though expectations for rate hikes later in the year seem to be diminishing, the June hike remains on the table. Regardless, Peter says its all going to be good for gold.

When the Fed raises rates in June – if the Fed raises rates in June – gold’s going to take off. If they don’t raise rates in June, then it’s going to explode even higher.”

Peter makes an interesting point near the end of his podcast – if the Fed does go forward with it’s June hike, it may well be the last rate hike of this cycle.

Which means all the Fed was able to do was get rates back to 1%, because right now, the Fed funds rate is target between 0.75 and 1. So, if they raise them again, then they’re going to raise it from 1 to 1.25. That’s basically the lowest point they got to under Allen Greenspan. And that was the rate that gave us the housing bubble that resulted in the 2008 financial crisis.”

At this point, the Fed should have no credibility at all. But of course, the media will blame Trump, and the Republicans, and Congress, and anybody else they can find. For some reason, the finger of blame never seems to point at the central bankers. But at this point, it’s pretty clear it should.

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