U.S. central bankers decided to maintain the FFR range at 0.25 to 0.50 basis points, keeping the discount rate at 1.00 percent.
While the Federal Reserve did see indicators of a strengthening labor market (along with projections of 4.5 percent unemployment by 2018), not all may be well. The central bank cut its 2016 GDP forecast to 2.2 percent from 2.4 percent previously, and also said global economic and financial developments pose risk for markets.
Fed Chair Janet Yellen spoke for about an hour to discuss the Fed’s outlook. However, is the Fed is losing credibility? Peter Schiff thinks so.
“The public knows that the economy is weak (that’s why Trump and Sanders are doing well),” Schiff told Benzinga in an email. “But the Fed can’t admit it and they are looking stupid as a result.”
Schiff expects increasingly dovish movement as the year goes on, pushing down the dollar.
“Most economists are saying that the current pickup in Inflation must mean that the economy is improving,” Schiff said. “To reach this conclusion one must not only ignore the basics of economics but also the very many signs that the economy is currently weakening drastically… The optimistic conclusion is that wages will rise to match price increases. But that is not happening (the last payroll report showed a huge drop in weekly earnings). So what we have is rising prices and flat wages…a terrible mix for consumers.”
Schiff said if the Fed were to raise rates in this environment, it would risk igniting a serious recession that would have huge political implications. Instead of risking this, he said, the Fed will continue to say that they want to raise, while hoping the economy will reverse course and strengthen.
“But the more likely scenario is that the Fed does nothing while promising to do something,” Schiff’s email said. “But if the economy weakens further, they will have to officially call of future hikes, and perhaps go back to zero. They will of course have to ignore any additional signs of inflation to do so. When the market realizes that, the dollar will plunge, and non-dollar markets and gold will outperform.”
Schiff then highlighted the current decline in U.S. manufacturing would be the first time since 1952 that Industrial Production has declined for four straight months without the U.S. economy not being in recession. A worse-then-expected 0.5 percent month-over-month plunge (near the worst since 2009) led to a 1.0 percent year-over-year drop, the fourth monthly decline.
The market responded positively following the 2 p.m. ET release. The Dow closed at its highest level of 2016 at 17,325.76. The SPDR S&P 500 ETF Trust SPY spiked sharply following the announcement, closing up about 0.6 percent at $203.39.
Schiff concluded by saying Yellen’s biggest loss of credibility today was when she said “April remains a live meeting.”
“There is literally no one in the world that expects a hike in April,” Schiff said.
BONUS TRACK: World’s Second Largest Reinsurer Buys Gold, Hoards Cash To Counter Negative Interest Rates
The world’s second-largest reinsurer, German Munich Re which is roughly twice the size of Berkshire Hathaway Re, is boosting its gold reserves and buying gold in the face of the punishing negative interest rates from the European Central Bank, it announced today.
As caught by Mark O’Byrne at GoldCore and reported by Thomson Reuters this afternoon, the world’s largest reinsurer is far from alone in seeking alternative investment strategies to counter the near-zero or negative interest rates that reduce the income insurers require to pay out on policies.
Munich Re has held gold in its coffers for some time and recently added a cash sum in the two-digit million euros, Chief Executive Nikolaus von Bomhard told a news conference.
“We are just trying it out, but you can see how serious the situation is,” von Bomhard said.
The ECB last week cut its main interest rate to zero and dropped the rate on its deposit facility to -0.4 percent from -0.3 percent, increasing the amount banks are charged to deposit funds with the central bank.
Munich Re is one of the largest reinsurance companies in the world – It oversees €231 billion in investments. A small 3% allocation to gold would equate to buying gold worth €8.19 billion. At the current spot price of €1,130 per ounce that would equate to 7.2 million ounces or 225.4 tonnes of gold bullion
The news is interesting and we believe that other institutions will follow in their footsteps and diversify into gold in order to protect themselves from negative yields. We have not heard of any other non central bank institutions diversifying into gold but it stands to reason that a small percentage will follow in Munich Res footsteps.
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It isn”t just gold: the German company confirms that when rates turn negative enough, physical cash will be increasingly more valuable.
As Bloomberg reports, the German company will store at least 10 million euros ($11 million) in two currencies so it won’t have to pay for the right to access the money at short notice, von Bomhard said at a press conference in Munich on Wednesday. “We will also observe what others are doing to avoid paying negative interest rates,” he said.
Institutional investors including insurers, savings banks and pension funds are debating whether it may be worth bearing the insurance and logistics costs of holding physical cash as overnight deposit rates fall deeper below zero and negative yields dent investment returns. The ECB last week cut the rate on its deposit facility, which banks use to park excess funds, to minus 0.4 percent.
“This may well become a mass phenomenon once interest rates are low enough — the only question will be where that exact point is,” said Christoph Kaserer, a professor of finance at the Technische Universitaet in Munich. “For large institutions, that may be the case sooner rather than later. The ECB will react with countermeasures, such as limiting cash.”
As Bloomberg adds, Munich Re’s strategy, if followed by others, could undermine the ECB’s policy of imposing a sub-zero deposit rate to push down market credit costs and spur lending. Cash hoarding threatens to disrupt the transmission of that policy to the real economy.
Munich Re, which oversees a total of 231 billion euros in investments, wants to test how practical it would be to store banknotes, having already kept some of its gold in vaults, von Bomhard said. This comes at a time when consumers are increasingly using credit cards and electronic banking to pay for transactions. Deutsche Bank AG Chief Executive Officer John Cryan has predicted the disappearance of physical cash within a decade.
“This shows the difficulties that the ECB is facing in its efforts to stimulate the real economy,” said Andreas Oehler, a professor of finance at Bamberg University in Bavaria. “Charging negative rates on overnight liquidity doesn’t stimulate longer-term lending. All it does is make companies’ and institutions’ payment transactions more expensive.”
Incidentally, once the Fed’s infatuation with playing central planning doctor fizzles as the economy relapses into an accelerating downward spiral, negative rates are coming to the US next, as such the real-time experiments of how to evade a repressive monetary regime such as those conducted by the Munich Re CEO will be particularly useful to those who want to protect their assets once NIRP crosses the Atlantic.