The Fed Blew It! More QE on the Horizon?

The Fed still claims that they are close to a rate hike. But Treasury bond prices are still telling a different story. So does economic data.

The jobs report Friday morning missed, and missed big time. For one, the number of jobs created in September was much lower than expected, missing by more than 30%. But for the prior two months to be revised sharply lower as well? The Fed’s been left without a leg to stand on!

And if you thought it couldn’t get worse, it did. Labor participation fell to a rate not seen since 1977.

But remember, the Fed is most concerned with wage growth, and… oops, there was none of that this past month either. And for good measure, the average work week also fell.

So if we ignore the unemployment rate that remained at 5.1%, which is meaningless by itself, the overall employment situation is not improving. It’s getting a lot worse.

As I mentioned months ago, the Fed had an opportunity to raise rates earlier in the year. Back then, employment and the economy looked to have gained a little strength.

Now, it’s too late. Their window of opportunity has come and gone, as has their credibility. A rate hike by the end of the year is now very unlikely.

Volatility continues in the Treasury bond market. As you can see below, rates have overall been falling since the Fed decided to leave policy unchanged. Investors clearly don’t believe in the Fed.

Since the Fed didn’t raise rates when they had their chance earlier this year, they won’t have a rate cut in their tool box if the going gets even tougher. If our economy declines further or deflation actually takes hold, they may go back to what didn’t work before…

You guessed it. More quantitative easing (QE).

On Monday morning, investors seemed to think QE4 was on the table since stocks moved sharply higher while bond prices moved lower. Bad news is now good news.

That’s the wrong mindset. It’s way too early to speculate buying stocks on possible central bank support. But that’s exactly what seems to be happening for now.

Rather, investors should be selling stocks. Weak employment, no wage growth, low and possible negative price growth – and not to mention the prospect for poor corporate earnings – does not a strong market make.