Sorry, Virginia, There Is No Santa Claus

So who looks more right now, President Trump or Federal Reserve Chair Jerome Powell? Based on the market’s reaction to last week’s Fed rate increase, we’d have to say it isn’t Powell.

That doesn’t mean he isn’t right, at least looking at the situation objectively and what Powell is supposed to be doing as Fed chair. While it’s certainly arguable that the Fed does need to take a pause from raising interest rates for a few months to fully digest the recent economic data, which is showing the economy slowing some – but nowhere near a recession – it is right to continue tightening, no matter how unpalatable that is to the market.

Quite frankly, most of the calls for the Fed to refrain from raising interest rates are blatantly self-serving. Of course, investors don’t want the Fed to ever tighten policy, because, as we’ve seen, higher rates mean lower stock prices. Not many people like that, especially when it’s been ingrained in them over the past 10 years that stock prices only go one way – up – and that “buying the dips” is a no-lose strategy to make up for past losses.

Welcome to reality, folks. Continue reading "Sorry, Virginia, There Is No Santa Claus"

The Waiting Is The Hardest Part

George Yacik - Contributor - Fed & Interest Rates

Surprise, surprise. The Fed isn't going to raise rates in June after all.

While the just-released minutes of the Fed's April 28-29 monetary policy meeting revealed the central bank "did not rule" out the possibility of raising rates at its June 16-17 meeting, "many participants thought it unlikely that the data available would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied."

In other words, economic reports over the past several months haven't come close to giving the Fed comfort to start normalizing monetary policy – i.e., raising rates – without jeopardizing growth, or what little there has been recently.

In the first quarter, U.S. GDP rose only 0.2%, down from the 2.2% growth rate in the fourth quarter of 2014. But economists are now expecting that figure to be revised downward next Friday, possibly to show negative growth. Continue reading "The Waiting Is The Hardest Part"

Does the big GDP revision get us any closer to 'normal' rates?

George Yacik - Contributor - Fed & Interest Rates

Will Tuesday’s GDP upgrade to its fastest growth in more than 10 years nudge – or push – the Federal Reserve to raise interest rates earlier than Janet Yellen recently signaled, i.e., no earlier than the first quarter of next year?
Alas, probably not.

The final revised estimate for third quarter GDP showed the economy growing at a robust 5% annualized rate, the fastest pace in 11 years. That was far higher than the previous estimate of 3.9% and well above both the 4.3% rate the Street was looking for as well as the most optimistic individual forecast of 4.5%. It was also up from the second quarter’s growth rate of 4.6%.

Ninety minutes later, the Commerce Department came out with another report that showed personal spending rising 0.6% in November, the most in three months, while personal income gained 0.4%, the strongest pace in five months.

A week earlier, the Securities Industry and Financial Markets Association predicted that GDP growth would hit 3% next year, which it says “would be the strongest growth in nearly a decade.”

If this latest batch of strong economic news still doesn’t convince the Fed that it should start raising interest rates sooner than it indicated only a week before, we can only conclude that the Fed has lost sight of its statutory mandate, namely to “foster maximum employment and price stability.”

Instead, it has become how to best finesse its extrication from its near-zero interest rate policy and start raising rates without setting off a giant market selloff. So the easy thing to do, as most other major decisions are made in Washington, is to do nothing and deal with it later, whenever that is. Which of course by then the problem will have grown much worse and much more difficult to deal with.

At its FOMC monetary policy meeting the week before, the Fed said that it “judges that it can be patient” in normalizing monetary policy, adding that “it likely will be appropriate” to maintain its near zero target rate range for a Continue reading "Does the big GDP revision get us any closer to 'normal' rates?"