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Dr. Doom: Fed Won’t Raise Rates In 2015
Aspire, Thought Leaders | 20 March 2015
By: Simeon Ang
Articles (125) Profile

So, the latest Federal Open Market Committee meeting has ended and with it, a huge sigh of relief from stock markets as language from the minutes of the meeting seemed to imply that interest rates will continue to remain low.

Marc Faber, aka Dr Doom, feels that the Fed won't be increasing rates anytime soon

“Dr. Doom,” Marc Faber certainly feels that this will continue for quite a while. He even went as far as to say that the Federal Reserve “will not increase interest rates this year.”

Faber made these comments ahead of a press conference by the Federal Reserve Chair, Janet Yellen.

The comments go against what almost one in two economists would expect. According to a Bloomberg survey, 30 out of 66 economists projected that the Federal Reserve will increase interest rates at their June meeting. Another 21 felt that the central bank will increase rates in September.

The Strong US Dollar
One of the reasons highlighted by Faber, the lead economist of the Gloom Boom Doom Report was that the US Dollar is currently strong. According to the graph below, the ICE (International Currency Exchange) US Dollar index is currently near its 10-year high.

Source: FactSet, the ICE US Dollar Index

While a strong US dollar can be beneficial for many things, the strong US dollar negates room for the Federal Reserve to manoeuvre in terms of raising interest rates. Increasing interest rates now would only ensure that the US Dollar appreciates even more.

The strong US dollar has already been blamed for a number of issues, not the least being falling US export figures and even weak oil prices. More importantly, the strong US dollar is the main cause of inflation figures in the US hitting below target.

Disappointing US Economic Data
Another reason that Faber brought up was the disappointing US economic data. According to Bloomberg, US economic data has been more disappointing than at any time in past six years.

According to the latest unemployment figures released by the US, wage growth dampened in February. At the same time, factory production also fell due partly to the strong US Dollar. At the same time, consumer spending also hit a 14-month low in January.

Fret Not Even If Rates Go Up
According to Faber, a measured increase in interest rates “would not be tragic for US stocks.” This is mainly due to the fact that stock markets have traditionally moved according to various different factors, aside from measures taken by the Federal Reserve.

Faber went on to say that “the Fed and other central banks would have to increase interest rates quite substantially to really knock off stock markets.”

Dr. Doom’s Advice
Faber also shared that the zero interest rate policies of worldwide central banks have “grossly distorted financial markets and misallocated capital.”

Nothing that yields on European stocks are relatively high compared to sovereign bonds; Faber felt that European equities will likely outperform US equities this year.

In addition, Faber mentioned that he has a preference for Chinese stocks as well, mainly because the Chinese government currently has more tools to prop up its economy than many other developed nations.

Source: FactSet, chart comparing SSE (Blue) with S&P 500 (Green), DAX (Red), and STI (Yellow)

In addition, the Chinese market seems to have underperformed foreign markets for roughly the last five years as can be seen in the chart above. This could mean that Chinese equities are not yet fairly valued.

Simeon, an LSE graduate, is currently the editor of Aspire. He specialises on topics surrounding trading psychology, politics and macroeconomics.

Please click here for more information about this author.

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