It’s Time To End "Considerable Time" Talk

George Yacik - Contributor - Fed & Interest Rates

What do you think will happen first: The Federal Reserve starts to raise interest rates, or the Cubs win the World Series for the first time since 1908?

Richard Lehmann, writing in his Fixed–Income Watch column in the recent issue of Forbes magazine, says the odds are about the same. Lehmann expects the Fed to keep short-term rates pretty much where they are – i.e. at or near zero – for some time to come. "The Fed talks a good line and promises to act responsibly once employment and the economy improve or the threat of deflation disappears," he writes. "But that's kind of like waiting for the Chicago Cubs to win the World Series again."

Actually though, the chances of the Cubs winning the World Series soon don't look so far-fetched. Now under Theo Epstein, the principal architect of the 2004 World Champion Red Sox that broke the 86-year old Curse of the Bambino, the Cubs have put together a solid team of talented young players and added former Tampa Bay Rays manager, Joe Madden, as their skipper during the off-season. Now they've also reportedly signed free agent pitcher, Jon Lester. Las Vegas currently has the Cubs at about 14 to 1 odds to win the 2015 Series, one of the top eight or so teams in baseball.

Can we say the same thing about the Fed raising rates soon?

The Fed finally put an end to its quantitative easing bond-buying program in October. The next step will be to finally start raising short-term rates, which is long overdue.

The conventional thinking on Wall Street is that won't start happening until the middle of next year at the earliest. Two senior Fed officials have recently voiced similar opinions.

I think it needs to start a lot sooner than that, like in the first quarter of 2015. We'll all be a lot better off for it.

All along, the Fed has said its decision on when and how much to raise rates will be "data-driven," meaning when it deems the economy strong enough to stand on its own and the fear of deflation suitably eased. But how much more data does the Fed need?

"Early next year the governing council will reassess the monetary stimulus achieved and the outlook for price developments," he said. We'll just have to wait a little longer.

If the recent performance of the Eurozone economy doesn't dictate that the time for action is right now – and Draghi noted that the drop in oil prices makes the ECB's efforts to boost inflation even more difficult – then when exactly would be the right time?

The recent spate of strong U.S. economic reports gives the Fed more than enough justification to start raising interest rates. Last Friday's stronger-than-expected November jobs report should have been the last piece of evidence the Fed needs. The increase of 321,000 jobs was the highest figure in nearly three years, and 2014 is finishing up as the strongest year for hiring since 1999. That hiring surge follows on the heels of other solid economic reports, like the 4.3% annualized growth in GDP over the past two quarters, the strongest six-month period since 2003.

Let's not forget the 40% drop in oil prices since last June, which amounts to a huge cash bonus for most Americans, just in time for Christmas, further fueling the recovery.

So if it's data the Fed needs to feel comfortable to start raising rates, it's got more than enough.

The real question is if it's got the guts to do it.

It's not hard to see why the Fed would be reluctant to start raising rates. It's created a huge asset bubble in equities and bonds, not unlike the housing bubble it helped create in the early 2000s before it pulled the plug, leaving us with the global financial crisis, the Great Recession, the housing bust and six years of sub-par recovery. When bubbles pop, things get messy.

"The fact is that it has not acted responsibly since 2005," Lehmann says of the Fed in his Forbes column. "The exception was 2008, and that was to correct a disaster much of its own making." No argument here.

That's why the Fed needs to act soon and not repeat its past mistakes of waiting too long. I for one hope to see the words "considerable time" missing from next week's monetary policy announcement about how long it expects to keep rates near zero.

Will there be pain when the Fed finally does pull the trigger on rates? Assuredly so. But the S&P 500 has risen more than 200% since 2009, so hopefully we can all survive a 10% or even 20% correction, something that hasn't happened in more than three years. That will deflate some of the air in the bubble and enable the bull market to continue apace for more years to come, only this time on its own merits and without artificial Fed support.

Visit back to read my article next week!

George Yacik Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from for their opinion.

2 thoughts on “It’s Time To End "Considerable Time" Talk

  1. Perhaps contrarian, but I suggest that the current strength of the dollar driving commodity deflation as well as the euro going in the tank from recession and Greece make it possible that the FR doesn't hike rates at all. Inflation is contained with a mild rise in wages more than offset by lower energy and eventually grocery prices, so the goals of the FR have been achieved with talk alone. Rate hikes now will crush the commodity markets and undercut the equities, so holding looks reasonable.

    $60 oil is a windfall, yet won't harm the big exploiters but will lead to an M&A frenzy as smaller drillers and lease holders are forced to sell.

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