September Fed Rate Rise Spectre Knocks Gold Price And Stocks - Again

London (Sept 11)  You put the Jack back in the box and it then jumps out at you again. As the September FOMC meeting approaches, the fear that the U.S. Fed will make a move towards raising interest rates at that meeting has surfaced yet again and is playing havoc with the markets. Gold slid back to the high $1,320s, silver was testing $19 on the downside, the Dow plunged almost 400 points, the S&P 500 fell over 50 points and the NASDAQ over 130 points. Crude oil fell around 3.7%, while the US Dollar Index climbed back to the mid 95s from a 94.99 close a day earlier.

Now maybe that should all be a warning to the FOMC. Apparently the downturn in the markets was because it was announced that the normally dovish Fed Governor, Lael Brainard, is due to speak at an event on Monday. The fear is that she may say something that is less dovish than her usual stance and that could trigger further falls as analysts and traders try to read that as foreseeing a Fed rate rise announcement at the meeting, despite this likelihood having been previously discounted because of a lower than anticipated nonfarm payroll increase a week ago followed by a fall in Services PMI. Manufacturing PMI had already been looking weak as well.

From gold and silver's point of view maybe the sooner the Fed does implement its second rate increase in a year (as opposed to the four rises it had been targeting at the end of last year) the better. If there is to be another rate rise this year it's likely to be another tiny 25 basis point increase which will still leave rates in effective negative territory taking real inflation into account, but if the rumour that such an increase might happen (and analysts apparently only give it a 24% chance that it will) can knock the markets back so much in a single day, what would the fact do?

Many well respected commentators and analysts have been predicting a stock market crash now for some time - and one that would rival, or even exceed, that of 2008 and if they are correct in their judgement it might only take a trigger like the next Fed rate increase to bring the whole house of cards crashing down. Can the Fed afford to take that risk? It certainly could talk itself into so doing having for so long preached interest rate normalization without doing anything apart from various board member statements being seized upon. We have commented before as to whether FOMC committee members should be allowed to make statements between meetings as every nuance of what they say is picked up by the markets and tends to move them sharply one way or the other. It is too easy to manipulate markets so - but then this could be deliberate Fed policy as yet another means of keeping people guessing, although the potential for thus influencing the markets, and the dollar, by individuals cannot be ruled out. There's an awful lot of money at stake here!

Source: Lawrie Williams