The Fed has zero credibility until it raises rates

A lot of hot air, but no substance. That’s what’s been emanating out of the mouths of Federal Reserve officials over the two years about the direction of interest rates — with no follow through of taking rates higher.

As a result the Fed has no more credibility left.  When Fed officials talked about moving rates in the past markets would move with their chatter.

Not so much recently.  Market participants are squelching out the talk and waiting for the Fed to walk the walk.

Cautiously waiting for the Fed

The Fed’s two day meeting wraps up tomorrow and markets are eagerly awaiting the release of any policy changes or revisions in the economic outlook from the central bank.  Many pundits expect a variation of the 1960s “Operation Twist” where the Fed lets shorter term US Treasury bonds mature and buys longer dated treasuries to reduce the interest rates on the end of the yield curve.   Others expect another bout of Q3-like monetization of debt.  If the Fed doesn’t do anything substantial I expect the weakness in the markets to accelerate and the head and shoulders pattern discussed in the previous article to play out.