Interest Rate Check - Confusion Sets In
A: As of right now even the experts are confused about whether Bernanke & Co. are going to raise the fed funds rate for the 17th consecutive time at June's meeting. In the past week or so I've noticed precious metal prices correct beautifully, but energy prices remain high. Today's GDP # showed a still strong US Economy but not as strong as wall street expected; in the end I think wall streets estimates are more important which tells me the markets view the latest GDP # as a sign the economy is not as strong as expected and inflation fears are not as troubling as expected.
Lets break it down this way in terms of what helps and what hurts the chances of another 1/4 point rate hike in June:
DATA FAVORING 1/4 RATE HIKE
The inflation leading indicator of high energy prices are still pointing towards a rate increase since there has yet to be a sizable correction in this market. Geopolitical concerns in Iran, Nigeria, & Venezuela are still leading to supply concerns for the oil markets keepin the price of light sweet crude around $70/Barrel.
For the fed to consider pausing at June's meeting we need the price of light sweet crude to correct to below $60/Barrel. At least that would warrant a 'WAIT & SEE' attitude by the fed.
To check oil prices & other commodity prices click here.
DATA FAVORING A PAUSE
The prices of precious metals have corrected substantially over the past 4 weeks, mainly as speculators (who have helped prices boom) took profits off the table and lowered their risk tolerance after the huge runup enjoyed over the past 6 months.
We are not out of the woods yet as the prices of precious metals need to stay down or even correct some more to convince the fed to pause at June's meeting. Here is a 6-Month chart showing the original runup and recent correction in the price of NY Gold:
The price of Copper, Silver, Platinum, & Palladium have had similar corrections over the past 4 weeks as the did NY Gold as shown above. The correction in precious metal prices will only help in convincing the fed to pause at June's meeting.
In addition to precious metal prices, US Economic data has shown that the economy is NOT as strong as wall street expected.
According to CNN Money article:
The nation's economy picked up speed in the first quarter, the government reported Thursday, but it didn't pick up as much strength as Wall Street was expecting. Consumer spending was up at a 5.2 percent annual rate, but that was down from the original reading of 5.5 percent growth. That was greatly responsible for the report coming in lower than forecasts according to Anthony Chan, chief economist for JPMorgan Private Client Services.But Chan said the report was a positive for markets because it calmed inflation fears and gave the Federal Reserve more flexibility to not raise rates at its June 29 meeting if it decides to do so. A closely watched inflation measure in the report, which measures prices paid by consumers for items other than food or energy, remained at a 2.0 percent annual gain, the same as the initial reading, which lessened inflation fears in the markets.
CONCLUSIONS: Its just too early to tell but if I were to guess right now I would say we still have a 1/4 point rate hike ahead of us at the June meeting. I strongly believe that energy prices are the most directly related to future inflation concerns and prices today are still high. If I see the price of oil correct substantially over the next 4-5 weeks then I would lean more towards a pause.
