Gold has retreated to the low end of the recent range after passage of the 2018 budget blueprint stoked optimism that the tax cuts will get passed as well. The prospects for lower corporate taxes is spurring risk appetite, sending shares higher.
As the stock bubble continues to inflate, the Fed may indeed be compelled to raise rates again in December, regardless of persistently weak inflation. The inflation that the Fed so desperately wants is occurring in asset prices, rather than in PCE, which they have identified as their primary benchmark.
As we’ve noted in previous commentary this week, PCE inflation has actually been declining since the central bank first started hiking rates in December of 2016. The Fed did do a one-off rate hike in December 2015, which proved to be a big mistake. That may still prove to be the case this time around as well.
The Fed also needs to consider the implications of a December rate hike if the rest of the world continues to lean toward easier policy:
— Bloomberg (@business) October 20, 2017
— Bloomberg Canada (@BloombergCA) October 20, 2017
BOJ's next challenge: unwinding Kuroda's legacy stimulus https://t.co/TyeBqgj20G Weak inflation nixes near-term exit from ultra-easy policy.
— Peter A. Grant (@USAGOLD) October 20, 2017
ECB set for longer, slower taper to keep a lid on euro https://t.co/hUsB0GLiHY
— FT Fund Management (@ftfm) October 19, 2017
With Fed quantitative tightening (balance sheet normalization) already underway, arguably the Fed is being plenty hawkish relative to the other major central banks. A December rate hike would result in greater and intolerable policy divergence, likely leading to a stronger dollar. Certainly appointment of someone like John Taylor to chair the Fed would have that effect.
However, President Trump has made it clear that he is not in favor of a stronger dollar. If reflation is the goal, via tax cuts, borrowing and spending. A weak dollar becomes all-but essential to pull that off successfully. The rest of the world maintaining easier policy may provide the necessary cover to maintain the pause in the current tightening cycle through year-end.