The issue of falling oil prices and their effect on the rest of the immediate measures of economic activity being transitory, as the Fed has insisted is the case for the past year, is proving not to be the case.
At some point soon, the Fed will have no choice other than to reverse course on the objective of tightening and begin the process of loosening again, regardless of what its official model of economic activity is indicating.
I don't know what excuse or reason the Fed will use for announcing this shift, but it will probably be based on an external factor like slowing exports due to a decrease in foreign demand, or simply something as opaque and all-inclusive as global pressures or deflationary forces.
I do not expect the Fed to address potential problems with the "ferbus" model or its inputs from other government agencies.
I think it is probable that it will have to reverse course even without the "financial stability mandate" I discussed yesterday being provided by Congress as the economic reports increasingly validate the concerns about economic activity being exhibited by capital market participants now.
The financial stability mandate would provide the Fed with the ability to address market concerns with monetary policy, rather than just economic concerns.
As evidence an economic retrenchment is under way is expressed in near-future reports on economic activity, the Fed will have to respond because the existing mandate requires it.
One of the leading issues for such is the decline in oil prices. Although the narrative that the decline is supply-driven rather than demand-driven has become the dominant theme, it is wrong.
The oil price declines are not a reflection of increased oil output causing supply to become greater than demand. They are a reflection of decreased demand globally, with the price declines being caused by production not being cut as demand declines.
The importance of this is that if price declines were being caused by supply increases, that would be a market event, and it is not logical to treat it as both transitory/temporary and an economic stimulus on its own.
If it is demand-driven, as is clearly the case, that's an economic event, not a market event, and requires a Fed response, as it is indicative of an economic retrenchment, regardless of what the Fed's economic model is indicating.
This is the pivotal shift in awareness that will have to take place at the Fed in order for the FOMC members to acknowledge the need to reverse course.
The Fed will also have to consider loan growth.
As I wrote about last month in the three-part series, "Fed Rate Hike Impact on Money Centers," although the December rate hike allows the banks to charge existing borrowers more on their adjustable-rate loans, unless this was followed by an increase in new loan originations, the net impact on the banks would be negative, and the banks would urge the Fed to reverse course.
It is most logical that that is already the case, with the Fed members now having to determine how to do so.
In the Dec. 15 column, "Gold Miners Are a Great Rate-Hike Hedge," I outlined the defensive strategy of investing in gold mines from two perspectives.
If the Fed was right about accelerating inflation, then the miners would increase off historically low levels.
If the Fed was wrong about accelerating inflation, then the gold mines would do well as investors moved to the perceived security of hard assets.
The Market Vectors Gold Miners ETF (GDX) is off by about 8.5% since then, but that is in comparison to 10% declines for the S&P 500 and Dow Jones Industrial Average and a 12% decline for the NASDAQ Composite.
When the Fed reverses course, and I think that will be soon, both gold and the miners should do very well.
More important, however, is that until the Fed makes that decision, the gold mines should still outperform the rest of the markets as investors increasingly seek safety in hard assets.