2015 Fed Rate Hike or Stimulus

The economy is in trouble, but you’re not going to hear that on CNBC.

The prevailing sentiment is calling for a Federal Reserve rate hike in 2015, but the inflation forecast is pointing to a very different scenario.

For the past six years, Fed stimulus has been a major driver of the economy, and by extension, the financial markets.  By official mandate, the Fed’s top priority is to avoid the economic threat of deflation.

Since the market crash in 2008, the Federal Reserve Board has actively used inflation as an apparatus to decide whether or not to add more stimuli to the economy. Any time the inflation rate falls below a target level, they pump money into the economy.

The following table shows each Fed intervention and the corresponding inflation rate for the past six years.

Form of Stimulus Date Inflation Rate
QE1 4th Quarter 2008 2.0%
QE2 3rd Quarter 2010 2.1%
Operation Twist 4th Quarter 2011 2.1%
QE3 Phase 1 3rd Quarter 2012 2.2%
QE3 Phase 2 4th Quarter 2012 2.5%

 

Like clockwork, every time inflation dropped below 2.2% the Fed intervened and announced a new stimulus program.

The problem, not widely discussed on CNBC, is that inflation dropped below 2% during the 4th quarter of 2014.  It is the lowest rate since Janet Yellen took office and it’s a sign that deflation is taking grip of the economy.

If past action is any indication of future decisions, then instead of a rate hike, I’ll be looking for signs of another round of Fed intervention in 2015.

 

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