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By John Grandits – July 28, 2017
One possible effect of the “America First” approach the Trump Administration vowed to take was a weaker US dollar. Shortly after we wrote about this earlier this year, the dollar index began a steady march lower, retreating 7% in just five months, from 102 in March to its current level of 95.
Not surprisingly, gold has risen almost 10% in US dollar terms during this time.
As recently as six months ago, many investors expected the dollar to continue its rally of the past few years based on stronger economic growth, via Trump’s agenda items, and tighter monetary policy by the Federal Reserve.
However, despite high expectations, so far Trump’s efforts to overhaul healthcare and reform taxes have fallen flat and have been short on substance. In addition, the continued investigation of Trump’s Russia ties has caused more investors to grow skeptical about the chances for meaningful reform, beyond unilateral executive action.
In a surprise move, the International Monetary Fund (IMF) just slashed its GDP growth forecast for the United States from 2.3% to 2.1%. It also cut its 2018 forecast from 2.5% to 2.1%. This type of revision hasn’t been seen anywhere in the world except for Brazil and South Africa, two deeply troubled economies.
The Fed has made good on two interest rate hikes so far in 2017, but based on weaker-than-forecast inflation and growth numbers, it will likely fall short of the four rate hikes it planned late last year. According to the Fed’s preferred method, Core PCE price deflator, inflation has been running well below 2%.
Economic growth, too, has been lacking—in the first quarter, it was just 1.2%, with consumer spending increasing only 0.6% year-over-year. Initial second-quarter GDP numbers are due on July 28 and may prove pivotal in the Fed’s decisions for the balance of the year. The Atlanta Fed is forecasting 2.4% growth, down significantly from the May 1 estimate of 4.3%.
But despite two rate hikes and impending balance sheet reduction, the 10-year yield has moved 15% lower since early March while the dollar has been weakening—both contrary to many forecasts at the start of 2017.
Typically, the Fed will raise rates when it thinks the economy is firing on all cylinders. But it’s becoming more evident that the Fed is now attempting to tighten policy into an economy that is weaker than in previous cycles. As exhibited by declining Treasury yields and very modest inflation, this is at odds with conventional market forces and investors’ expectations for growth.
At this point, Yellen may be forced to raise rates later this year. She needs to at least come close to the four rate hikes outlined for 2017 in order to have some ammunition if the economy falls into recession. Fed fund futures are currently putting the odds of one more rate hike at about 50%.
In the meantime, the Fed will continue to jawbone the market, a favorite …read more
Source:: Gold Silver Worlds
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