Gold prices moved above $510 an ounce in Asian trading today, touching the highest price since 1980. Embedded in this ongoing bull market for the precious metal is the not-so-subtle message for the Fed at its meeting next week to keep hike rates.
By implication, the gold market would like to see additional tightening in the money supply of the world’s reserve currency. Echoing the embedded counsel in the price of gold is the Shadow Open Market Committee, an informal club of monetarist-leaning economists who second-guess the Fed and otherwise issue pronouncements on monetary policy in their spare time. Nothing less than additional rate hikes are still required, the SOMC said in a statement yesterday, according to Bloomberg News. “Conditions require a more aggressive stance to ensure that inflation and inflationary expectations do not take root,” the committee advised.
Even the bond market seems inclined to agree these days that the Fed should further constrict money supply next week. The yield on the benchmark 10-year Treasury Note continues to rise, closing yesterday’s session at roughly 4.57%, the highest close since November 14.
Meanwhile, the latest trading in the December Fed funds futures assumes that the central bank will raise rates to 4.25% from the current 4.0%.
The predictions are in, and the prices have been reset; all that’s needed now is for the Fed to confirm what everyone already expects. At some point, the Fed will stop raising interest rates, but not just yet. Chatter recently that the end of the rate hikes is in sight reportedly helped elevate equity prices in recent weeks. But in a sign of the moment, the S&P 500 slipped yesterday, perhaps signaling that the stock market too thinks more rate hikes are coming after all.
So, what economic and financial wallpaper might attend an end to rate hikes once it finally comes? The chairman of Atalanta/Sosnoff Capital and Forbes columnist Martin Sosnoff thinks he has the answer. Writing yesterday, he opines: “If you want to know when the Fed stops bumping the Fed funds rate, just project when the economy will show some deceleration, when oil prices will range closer to $50 per barrel than $60, and when wage inflation holds at its benign rate of 2.5%.”
Good luck with that one. But Sosnoff redeems himself by offer a bit more clarity in his prognostications: “My best call is that the Fed relents by next spring after oil stabilizes around $50 a barrel. The market would experience a change of leadership. Big-cap growthies would outperform, even Wal-Mart and Microsoft. Money would come back into GE, Procter & Gamble, Philip Morris, Intel, IBM–anything with 10% top-line and bottom-line momentum.”
In fact, S&P’s retooled style indices already show just that in the fourth quarter. The S&P 500/Citigroup Pure Growth Index has posted a total return of 3.03% this quarter through December 5, vs. a 0.51% loss for its value counterpart. Is this evidence that value’s long dominance is finally fading? If so, who could have predicted that growth would return during an extended period of Fed tightening? Higher interest rates = a boost for growth stocks? Apparently so. Any other questions?