2016-10-04 3pm EDT  |  #Federal Reserve #FOMC #stocks #bonds #gold #US dollar #Loretta Mester

Barring some major surprise, the Federal Reserve is set to raise rates at their upcoming December meeting. Yesterday on Bloomberg, Federal Reserve President Loretta Mester even made the case for hiking in November.

The U.S. Federal Reserve should not delay in raising interest rates in order to keep up with the economy, said Cleveland Fed President Loretta Mester, suggesting she would again back a modest policy tightening next month.

“We have to be a little pre-emptive in making sure that we’re moving the interest rate up so that we can keep the expansion sustained,” said Mester, one of three Fed policymakers to dissent against last month’s decision to stand pat on rates.

Speaking on Bloomberg Radio, she added that the case would “remain compelling” to back a rate hike at the next policy meeting, on Nov. 1-2, were the economic data to come in largely as she expects.

The November FOMC meeting is just a couple of days before the US election, and although the Federal Reserve might mouth words about being non-political, a rate hike at that point ain’t gonna happen. Ignore anyone who tells you otherwise.

But a December hike is pretty well a lock, so I thought it would be instructive to review what happened last December when the Fed last hiked rates. It’s hard to believe it has taken them a whole year to get another one under their belt… Wait, we’re not there yet, I probably shouldn’t be so presumptive.

Regardless, let’s have a look at the charts. First up is the US dollar.

The US dollar exploded higher during the last quarter of 2015. As I write this morning the US dollar is running like it stole something. If we do manage to break out, it might be the start of a rise that echoes last year’s move.

And with a higher US dollar usually comes a lower gold price.

Last year gold sold off hard into the Fed rate hike. But interestingly, it bottomed almost to the day of the actual FOMC meeting, and then embarked on a big run. Currently I am looking for a point to once again get really bullish on precious metals. Waiting until we are closer to the December rate hike might prove prudent. Too many hedge funds are still too long gold and especially silver. An October/November shake out could clean up the crowded nature of this trade.

As for stocks, they rallied into last year’s Fed hike, but could not hold their gains.

And finally, bonds sold off a little in the months before the Fed rate rise, but then ripped higher from there.

Obviously there is no guarantee markets will follow last year’s path. Yet I think it helpful to remind ourselves of the action leading up to the Fed’s rate hike. Remember, history rarely repeats, but it often rhymes.

Thanks for reading,
Kevin Muir
the MacroTourist