Rates Left Unchanged, Now What for Grains?

Well, there you have it. Groundhog Day. The Federal Reserve has decided to leave interest rates unchanged at their current levels. Those levels are considered 'emergency levels' at or near 0% to help stimulate the flagging economy. 

That is where the dangerous part of the story begins. With interest at or near zero for over six years, the U.S. economy can hardly muster up any inflation. Who could have ever forecast the low level of inflation in the face of zero interest rates? That tells me our economic engine is broken. 

Unemployment is at 5.1% and has been on a steady decline from 6.5% not long ago. We have averaged 220,000 new jobs per month for the last three months. That sounds pretty good – but not so fast. The participation rate is at its lowest levels since 1977. Actually, it is setting an all-time record low month after month. This is the first time we have seen an unemployment rate drop at the same time we set a record low in the participation rate. That also tells me that more and more people have smaller and smaller paychecks. The engine is broken. In my 28-year career, we have raised interest rates to cool off an overheating economy or get out in front of an economy that looks to be close to overheating. None of those is true. Hence, the reason the Fed held off on a rate rise today. I think they can see that the engine is broken. 

We never raise rates to stay relevant or prove our strength. That would be a mistake. 

I will stick by my own personal opinion that I think that the Fed have talked themselves into a corner. Is it possible that they could raise rates? Yes. Do I think they should raise rates? No. 

The dollar has already started to fall. That will help our exports and any multinational firms doing business abroad. But with the talking heads already debating an October Fed meeting rate rise, the fall in the dollar initially won't be as much as it could. So what does it mean to us? I think the Fed's continued confusion surrounding the situation is not a help. They act like they want to raise rates, they talk about raising rates, but they also talk about being data-dependent. The data keeps coming in worse and worse making their strategy of buying time a riskier and riskier one. After this announcement, the Fed has downgraded both inflation and growth for the next two years. They seem to see that the engine is broken. 

No real wage growth combined with downward revisions to inflation and GDP have got the Fed on the run. The real worry about today's no rate rise is 'have they seen something bad in the economy that we don't see yet?'

So what will be the fallout?

I think that the internal U.S. economic indicators will weaken. That may weaken the dollar. That will tell us that the economy is not that great. A cheaper dollar is good for exports, but a weak economic situation around the world may cancel that out. That is a sticky situation. 

Keep your marketing plans tight and nimble. This is not a normal situation, and the idea of normalizing rates in an abnormal environment seems to be extremely difficult. We are in a slow-to-no-growth economy. The world is also slowing down, and the real risk here is a global recession rather than global inflation. We see no real growth, no real inflation, and help coming from economies abroad. China rescued us in the throes of our 2008 downturn. They don't have the ability to do that this time around. 

The question really comes down to this: Who does? 

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Written by Scott Shellady, Senior Vice-President of TJM Investments