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Fed Unlikely to Raise Rates with Dropping Oil Prices

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Financial markets are watching the Federal Reserve this week to see if they change any of their language regarding monetary policy going into 2015. Janet Yellen will give a statement on Wednesday, and how she addresses interest rates is of particular interest. Economists are expecting the Fed to drop the phrase “considerable time” from their statement, which could indicate an interest rate hike in the first half of next year. This would be the rational course of action if the US economy is actually improving, as the Fed claims.

However, as Peter Schiff has been saying for some time, the economy is not really improving. Peter expects that the Fed will find more excuses to not only keep interest rates down, but to actually start up another round of quantitative easing before too long.

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Enter renowned financial manager Bill Gross. Last week, he suggested that the plummeting price of oil might be that very excuse. Gross spoke with Tom Keene on Bloomberg Radio, explaining why he doesn’t see the Fed raising interest rates anytime soon. In fact, the low oil price might make the Fed more dovish, according to Gross.

If oil prices stay depressed, a dovish Fed could mean that QE4 is just around the corner…

Tom Keene: Oil is dropping like a rock. [The Fed] has to adjust to that, don’t they?

Bill Gross: I agree… The Fed is on record saying that, ‘No, they don’t look at stock markets, but they look at financial conditions.’ To the extent that oil is a significant financial condition for the real economy, even more so I think than the stock market, then they would have to take that into consideration… Yes, I think it moves towards a dovish stance relative to what the market expected…

It’s a highly levered world, and a still highly levered US economy is dependent upon cheap financing and a very sharp yield curve. You can’t do what Volcker did back in 1979… What that means for the natural rate of interest… I think it’s closer to a 0% real [interest rate], and maybe even lower, which is close to where we are now…”

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