If we’re to believe the financial press, there is at least a 50-50 chance the Federal Reserve will raise interest rates at its next meeting on September 20-21. I’ll believe it when it actually happens – but not a minute before then.
The Wall Street Journal story on the release of the minutes of the Fed’s July 26-27 meeting last week, written by its senior Fed watcher Jon Hilsenrath, said the Fed announcement “suggested a rate increase is a possibility as early as September, but that the Fed won’t commit to moving until a stronger consensus can be reached about the outlook for growth, hiring and inflation.”
But haven’t we heard that before? All the Fed did was provide more of the same “let’s wait and see what happens before we do anything” prevarications.
“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity,” the Fed minutes actually said. “Members judged it appropriate to continue to leave their policy options open and maintain the flexibility to adjust the stance of policy based on incoming information.”
Sound familiar? The Fed has been saying basically the same thing for most of the past year, if not longer, to justify delaying a return to “normalizing” interest rates.
As Curt Long, the chief economist of the National Association of Federal Credit Unions, said, “The constant refrain of 'data dependency' from Fed officials loses its meaning when there is no consensus on what the data means, much less which policy course is warranted.”
About the only thing new in last week’s Fed statement was that two of its most recent excuses for not moving forward had been “alleviated.”
“Participants generally agreed that the prompt recovery of financial markets following the Brexit vote and the pickup in job gains in June had alleviated two key uncertainties about the outlook,” the minutes said. That’s good to know, but there’s no guarantee that the U.K.’s exit from the European Union will run smoothly—it probably won’t—or that job growth will remain relatively strong and steady—it rarely has. So there’s no reason to believe the Fed won’t change its mind yet again.
The release of the July minutes slightly undercut comments from William Dudley, president of the Federal Reserve Bank of New York, who got everyone excited that the Fed might indeed raise rates as early as September. Just a day earlier, Dudley told Fox Business Network that “we’re edging closer towards the point in time where it will be appropriate I think to raise interest rates further,” adding that a rate hike in September “is possible.”
But on further reflection, did Dudley say anything different than the Fed said in the July minutes? A little more hawkish, maybe, but again carefully hedged.
Dudley also reiterated comments he made back in May that the presidential election won’t affect the timing of a Fed move. “I don’t think the election would weigh on us one way or the other,” he said last week. Three months ago, he intoned, “We’ve proven over and over again that we can act in presidential election years, taking controversial policy decisions. We’ve done that before; we’ll do that again. We’re about as apolitical as you can imagine, just focused on our goals.”
I’m not sure I believe that one. First of all, the Yellen Fed seems deathly afraid of making any decisions, controversial or not. Second, it’s hard to believe political considerations don’t enter into their policy decisions. Of course, they do. If influencing the direction of the economy, the mandate of the Fed, isn’t a political decision, what is?
Meanwhile, months of Fed indecision continue to take their toll on the financial markets.
The Wall Street Journal also reported last week that, according to statistics from FactSet, the companies in the S&P 500 paid out nearly 38% of their net income in dividend payments in the past year, the highest percentage since February 2009. The annual dividend at 44 of those firms exceeded their latest 12 months of net income, meaning they either borrowed money or tapped their treasuries to make the payments.
While all of us holders of dividend stocks would like that happy state of affairs to continue, we have to admit that it can’t.
Is the Fed responsible for this? Indirectly, yes. By keeping interest rates so low for so long, investors have few choices than to buy dividend stocks if they want some semblance of a yield. And companies are happy to oblige, since the sputtering economy and increased regulation disincent them from investing in their own growth, plus super low-interest rates encourage them to borrow, even if only to pay dividends.
The dividend yield on the S&P 500, now about 2.2%, stands well above the yield on the benchmark 10-year Treasury note, which last Friday was yielding less than 1.60% at current prices.
David Rosenberg, chief economist at Gluskin Sheff & Associates, told the Journal: “When I started in this business back in the ’80s, you bought bonds for the coupons and stocks for the capital gains. That’s been flipped around.”
If this isn’t more evidence of a bubble, I’m not sure what qualifies. And if we don’t prick it soon, it could leave an awful mess. Hopefully, that’s one of the data points the Fed is looking at. But then again, the Fed rarely sees a bubble, especially one it’s created.
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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.
the fed normally does not like to move right before an election.
The only thing they are accomplishing by their repeated unfair, illegal market manipulating "jawboning" is crushing the price of "paper" gold and silver. Then, when their "jawboning" is proven to be another lie, the price of gold and silver are held down generally not to return to their previous levels. The insiders are getting filthy rich off of all this "fed speak". Rinse and repeat, absolutely disgusting!