Fear Of Waiting Too Long

With interest rates hovering near zero, the Federal Reserve is in a difficult spot. Even if the Fed raises rates in September, they still have two problems on their hands:

1. Very limited supply of policy bullets if the economy goes south.
2. A 0.25% hike would still leave a tremendous amount of inflation-tempting liquidity in the financial system.

But Inflation Is Low, Right?

Yes, it is. The issue is not where inflation is today, but where it may be down the road. The longer the Fed waits to start draining liquidity from the system, the higher the odds inflation will begin to pick up down the road. Even if they raise rates in September that would hardly represent a significant change to future inflation risks.

How Concerned Are The Markets?

Is the current pullback in stocks different than recent V-bottom pullbacks (i.e. October 2014)? The answer is provided in this week’s stock market video.

Investment Implications – Bulls Need To Prove It

Our market model began reducing risk on July 24. The model will only consider increasing our exposure to stocks if the hard evidence can begin to improve. A good start for the stock market bulls would be to clear and hold above the 2001 to 2032 range on the S&P 500.

Another and more detailed look at V-bottom odds can be found in this August 21 analysis.