Market observers would not expect the Federal Reserve to raise rates in October or December this year because historically the US central bank has been sensitive to international concerns, said Bill Smead, CEO and CIO of Smead Capital Management.
Many times in the past the Fed has been sensitive to what has been going in Asia or Latin America, and thanks to the recent developments in Brazil and China, caution prevails.
While Fed Chair did mention China in the FOMC meeting, she didn’t mention China even once during her speech Thursday. Asked to comment, Bill said the Fed probably inferred if they’d raise interest rates in the middle of market turbulence the dollar may become extremely strong and set the ground for some more commotion, which would trigger another race to the bottom in the world of currency participants.
The interesting part of all these developments is to ask how the current problems stack up compared to past market declines. Janet Yellen is possibly trying to send the message that, although the markets are correcting, there won’t be an end of the world situation soon. The financial economy is slowing down, but they are doing just fine, he observed.
In her Thursday speech, Janet Yellen said while the US Fed failed to meet its inflation target of 2 percent, the factors responsible for low inflation is likely to prove transitory. Yellen seems to say inflation will pick up soon as much of current low price levels were caused by weak oil and commodity prices.
Asked to comment, Bill said oil and commodity prices will not jump soon because the phenomenon between 2001 and 2011 was a bubble of great magnitude, similar to dotcoms and tech stocks. It was an all encompassing belief that there was a new plateau in commodity prices and oil.
Typically, a boom cycle in commodities is followed by a bust cycle and after the bust, prices stay on the floor for a long time. Inflation is going to show up elsewhere—in residential housing in the US, because there are 86 million people between 20 years to 39 years that don’t own a home yet. Statistics released this week show first time buyers are showing up in a big way to purchase homes and inflation takes hold when too much money chases too few goods, he concluded.
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