The Federal Reserve says it will raise interest rates to 1.375% by the end of 2016…
DON’T BELIEVE IT!
As I’ll show you today, it would be absolutely foolish for the Fed to raise interest rates very much in 2016…[ad#Google Adsense 336×280-IA]The rest of the world outside of the U.S. is struggling to grow. And the U.S. high-yield bond market is sending serious warning signs today.
The most recent bout of fear in high-yield bonds (also known as “junk” bonds) was strong.
I think of the junk-bond market as the “canary in the coal mine” for the stock market and the economy…
Visualize it with me… A group of old-time miners carries a caged canary into a mine tunnel with them.
If lethal gases are present in the mine, the canary will die… the miners will realize there’s danger they can’t see… and the miners will get the heck out!
Junk bonds are just like the canary… When the junk-bond market starts to die, the Federal Reserve needs to pay attention… There’s danger ahead.
The junk-bond market has been a great “canary” over the past quarter-century… forecasting trouble and Federal Reserve rate CUTS.
You see, when interest rates on junk bonds start to rise (or more specifically, when the spread of the junk-bond interest rate over the risk-free interest rate starts to rise), it’s a signal that trouble is ahead. It’s a signal that the Fed should CUT interest rates. Take a look:
The message from the chart is simple: Junk bonds tell the Fed what to do. When the junk-bond-rate “spread” starts to rise quickly, the Federal Reserve starts to cut interest rates. The Fed doesn’t stop cutting interest rates until the bleeding in junk bonds has stopped.
The message from junk bonds today is that times are still dangerous out there… that conditions are unsafe… and that it’s time to hustle out of the mine. In normal times, the Federal Reserve would lower interest rates to ease the stress. Instead, the Fed is RAISING interest rates.
So why are the folks at the Fed raising rates? In short, because they said they would… The Fed might have lost credibility if it didn’t raise interest rates. It has been crying wolf about raising rates for years.
The Fed accomplished its one goal this month – it showed us it’s not crying wolf anymore. But with all the trouble in the world and in junk bonds, the Fed really shouldn’t dramatically raise interest rates in 2016. It should use a cautious approach.
So even though the Fed says it will raise interest rates to about 1.375% by the end of 2016, I seriously doubt it will raise them that much…
Source: Daily Wealth