INSIDE THE FEDERAL RESERVE 107made the dollar stronger because of money that has flowed
into the U.S. from around the world in search of yield. But the
strong dollar is deflationary because imports cost less in dol-
lar terms. This deflation moves the Fed away from its inflation
targets and makes the rate hike less likely.
Taking into account deflationary trends, the strong dollar,
weak labor markets and the dovish composition of the new
FOMC, it seems likely that no interest rate hike will be forth-
coming in 2015. In fact, if the economy remains weak, another
round of QE could be in the works by early 2016.
If this scenario plays out as expected, it could be extremely
bullish for U.S. equity markets. Right now, equity markets are
priced for a rate hike in mid-2015. When markets realized that
easy money policies will continue into 2016, another upward
thrust of the bull market would commence and a level of 2,200
or higher on the S&P 500 index would not be surprising.
You should never go “all in” on stocks. Certain bubble dy-
namics are at work, and a substantial stock market collapse
in the years ahead is foreseeable. This is why I have always
recommended a substantial cash component for your portfolio
to reduce volatility and preserve your wealth in case a crash
comes sooner than expected.
But for 2015, the Fed still rules the roost, and a decision to
delay rate hikes until at least 2016 could be just the tonic need-
ed to keep this long equity bull market alive for another year.
■ “We don’t know what we’re doing”
Don’t ever think for a minute that the central bankers know
what they’re doing. They don’t.
That’s not only my own view, but I’ve heard as much from
the mouths of a couple central bankers. I recently spent some
time with one member of the FOMC, the Federal Open Market
Committee, and another member of the Monetary Policy