Here we go again!
Despite every effort from the Federal Reserve to create inflation, today the Labor Department reported that the producer price index fell despite an expected gain.
So what's the driving factor here?
Well we keep being fist fed by Washington and the mainstream media, for what seems like the better part of a decade, that we are in some type of an economic recovery meanwhile wages are not rising, and the money velocity remains near historic lows.
The Federal Reserve is stuck.
At present the federal reserves balance sheet, that is the debt it is currently holding, is larger then the GDP of most countries on Earth.
The Federal Reserve has been talking about "normalizing" their balance sheet over the past several months, which would involve dumping the mortgage-backed security's on their balance sheet and stop reinvestment's of maturing long bonds.
In theory, the effect of normalizing their balance sheet would push interest rates higher however, as I have been saying for months I do not believe that the Federal Reserve is going to be able to normalize the balance sheet for the foreseeable future.
I still believe it is possible, (and likely), that the Federal Reserve will raise interest rates one more time this year, expect another 25 basis point hike to the federal funds rate later this year-then they are done.
Keep in mind as a Fed watcher myself, I have only been wrong one time with regard to the Federal Reserve's actions on interest rates ever since they have been talking about raising them status post the 2008 financial meltdown.
The Federal Reserve is going to keep their foot to the floor with regard to providing a backstop for the stock market, especially in light of recent Geo-political events.
I expect the Federal Reserve is going to keep pressure on the dollar for as far as the eye can see, in attempt to artificially create inflation. Moreover, the lack of wage growth and money velocity will keep the Federal Reserve's hands tied with regard to normalizing their abnormal balance sheet.
Gregory Mannarino @marketreport
