Fed To Markets: See You In 2019

George Yacik - INO.com Contributor - Fed & Interest Rates

The Federal Reserve has made it pretty clear, by its actions if not by many of its pronouncements, that, like Melville’s Bartleby the Scrivener, it really would prefer not to do anything. Now it looks like it’s planning to take off not just the rest of this year but the next couple of years, too.

Instead of no rate increase this year, which is looking more and more like a done deal, we may not see higher rates until 2019 at the earliest, at least according to one Fed official.

Last week, as expected, the Fed left interest rates unchanged while lowering expectations for future rate increases, both this year and beyond. In arriving at that decision, which was unanimous, the Fed’s monetary policy committee cited recent weakness in the jobs market, previously an area of relative strength in the economy.

“The pace of improvement in the labor market has slowed while growth in economic activity appears to have picked up,” the post-meeting Fed announcement said. “Although the unemployment rate has declined, job gains have diminished.” That was a clear reference to May’s awful jobs report, which the Fed should have seen coming but for some still unexplained reason was blindsided by it like the rest of us mere mortals.

The Fed now expects the federal funds rate to rise to 0.875% by the end of this year. With the fed funds rate currently at 0.25%, courtesy of last December’s first-in-ten-years rate hike, that would imply two rate increases this year. However, six Fed members, up from only one two months ago, see only one rate hike this year, while only two see three or more. So where are the votes for a rate hike going to come from?

Kansas City Fed President Esther George, the lone Fed member voting for rate hikes the past few meetings, appears now to have thrown in the towel, siding with the rest of her colleagues to vote for no change at least week’s meeting.

The odds for a rate increase at the Fed’s next meeting in July are now below 20%, while a rate increase before the end of the year now stands no better than 50-50. In my last two columns, I said the Fed wouldn’t raise rates this year, both for political and policy reasons. I see no reason to change my thinking; last week’s Fed meeting results only make me look even smarter.

Now we have James Bullard, the president of the St. Louis Fed, going one better – or worse, depending on your point of view. On Friday, he said he now favors just one interest-rate increase not just through the end of this year but through 2018!

His reason? He’s calling for 2% economic growth over that time, which is right in sync with the Fed’s updated forecast released last week. As a result, he sees the target for the fed funds rate going no higher than 63 basis points during the remainder of his forecast; the current target rate is 25 to 50 basis points.

What this means, of course, is that we have at least another two years of economic stagnation to look forward to, making us look more and more like Japan and Europe every day, if only slightly better.

That is, of course, only if we continue to follow the same failed economic policies of the current administration, which consists of higher corporate and personal taxes and increased regulatory burdens and financial obligations foisted on companies, strongly discouraging them from investing in their businesses and hiring new employees. That won’t change unless there is regime change.

As European Central Bank President Mario Draghi complained a few weeks ago, central banks can only do so much. They have no control over taxes and regulations. They can lower interest rates all they want – and they’ve certainly been successful in that regard, at the risk of creating giant asset bubbles – but they can’t force businesses to borrow money if those companies see scant return on their investment or if it’s still too expensive to hire more workers because they have to provide them with higher pay and benefits than they can afford.

What central banks can do is give investors and the public a much clearer picture of what they’re doing on the monetary front. On that score, the Fed has failed miserably, and it’s been getting worse.

Dating back to last year, Yellen and the Fed have been bracing the markets for what they told us would be a gradual series of interest rate increases. Unfortunately, they made the mistake of predicating those increases first on economic data and then on world events, giving themselves an out every time they were poised to make a decision that might upset some people.

First, there was the Greek debt issue, then it was lower economic growth and the stock bubble in China. More recently, she said the Fed would be raising rates “in the coming months,” but that got dumped after the May jobs report. Next, presumably it will be Brexit, then it will be the U.S. presidential election, then it will be something else.

“This mismatch between what we’re saying and what we’re doing is arguably causing distortions in global market financial pricing, causing unnecessary confusion for future Fed policy and eroding credibility,” Bullard himself said last week.

Like a young couple deciding on when is the right time to have a baby, guess what? It’s never the right time. But at some point, you stop the excuses. Ten years past the Great Recession, it’s time to move forward.

Deliberately or not, James Bullard may have revealed Fed policy over the next two-and-half-years, namely: We’re not going to do anything. Now let’s see if they stick with it. It’s not a good policy, but at least we’ll know what it is.

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George Yacik
INO.com 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 INO.com) for their opinion.

9 thoughts on “Fed To Markets: See You In 2019

  1. There is no reason for the Fed to increase interest rates now or any time soon from the look of it. There certainly is no arrow of righteousness pointing to higher interest rates as some seem to believe. From a socioeconomic standpoint, it would make much more sense to repeal the bush tax cuts should the economy ever show signs of overheating, as they were reckless and destructive in the first place.

    1. "From a socioeconomic standpoint, it would make much more sense to repeal the bush tax cuts should the economy ever show signs of overheating, as they were reckless and destructive in the first place."

      Low interest rates are a symptom -- of economic decline and stagnation. Raising taxes will do nothing but feed more into to maw of the insatiable monster called government spending. Yellen and her pals have mortgaged the future of an entire generation with their epic failed experiment.

      1. Raising taxes does exactly the same thing to the money supply that raising interest rates does, but in the case of the bush and/or reagan tax cuts, which were basically handouts to the already filthy stinking rich, the modest pain that the well to do would endure is nothing compared to what working people would face in the event of interest rate hikes in the present economy.

        1. I should have mentioned ".. in the present economy which is slowly digging out of the sewer that right wing fraudonomics built for it.

          1. LOL. Right. Its all "Bush's fault". LOL. Our current economic anemia has absolutely nothing to do with the out of control spending pushed on the tax payers by the Administration and Demo and RINO controlled Congress over the past 7 years. Higher interest rates means higher return for SAVERS. Do you know anyone who is earning a return on their savings nowadays?!? Stop drinking the koolaid from the MSM and partisan politicians. We aren't in this mess because of ONLY Republicans or ONLY Democrats. BOTH parties have screwed us royally. BOTH parties have created this MESS and neither has done anything to fix it. Don't fight each other. Fight the corrupt ba$tards in D.C. who created this mess and who have done nothing to turn things around.

          2. FedUp, not all Bush's fault. Plenty still belongs on the shoulders of the patron stain of fraud, st. raygun.

            Have you noticed that the only presidents in the last 40 years to lower the deficit have been Clinton and Obama? Of course numbers don't really matter to the true believers..

    2. Yeah. If we're ever to be rich we need more taxes! Look what it's done for EU - Their growth rate has always been much higher than ours! (uhhhhh..............yeah.)

      1. We need to return to the policy of progressive taxation that helped make the USA the richest nation on earth and stop kissing rich folk's butt. They have been handed enough dough over the past 35 years to wipe out the entire national debt and still be filthy stinking rich.

  2. The comment from Draghi underscores the need for a higher minimum wage, higher taxes and higher insurance costs to keep the economy from healing and continue the decimation of the middle class - and - eventually leave the USA as broke as a third world country.

    Interesting article, likely accurate on the 2019 mark until we get there and it becomes 2022. 🙂

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