Are you sick and tired of the FED talk yet? For most people, yes, even economists included, it is time to get on with it….raise rates or keep them at 0%, just give us some clear direction. It is time to get a real plan and stop leaving the world in limbo.
The FMOC release on Wednesday was more of the same as the FED keeps kicking the can down the road. The market rightfully priced about a 0% chance that the FED was going to raise, and after the minutes re-lease, the stock market crashed down, only to make a “V” shaped recovery after the big players knocked out investors and stop losses all within an hour.
I talk about it all the time, the FED is in a no win situation, and are backed into a corner. Wednesday’s press release again had the following statement, “The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen some further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term.” We have Yellen and other FMOC members giving public statements that rates will rise before the end of the year, and then we have direct press releases from the FED that wages and employment need to rise and inflation needs to hit 2% before a hike will take place.
The next FMOC meeting is December 15-19, and we live in a gigantic global economy and there is no way that the American economy can “move on a dime” and achieve the FED target objectives in the next 6 weeks. If the FED raises in December without meeting the objectives that have been outlined since rates hit zero, the FED will lose creditability. If the FED does not raise rates in December then Yellen and the individual FMOC members will lose credibility.
I wrote an editorial back on April 29th, titled, “The FED Will Keep Rates Low for 2-5 More Years,” and at the time I was lampooned.
“If the FED does rise when will it be? June and July are out, there is no way that we can hit Yellen’s inflation target by then. September or October? The markets are too weak in the fall; this is traditionally when we have market crashes. We are already building up for a major equity reversal, if the market reverses before either meeting then she can’t raise, and if the market has not crashed by then it will be painfully obvious that the market will be correcting soon, and the last thing the FED wants on their hands is a market crash shortly after a raise.
The next option is December….using some Economist “on the other hand” talk, if equity markets make it to November without a major correction this is the meeting that we could see Yellen call for an increase…. if Yellen does not raise at the December meeting, we can’t get our inflation and GDP numbers to hit where we need and wean off the QE and Bond Buying madness fast enough to start seeing a good Economic case to raise the FED Funds Rate until 2020 or 2021. So here is some Economist logic for you, slim chance for increase in Dec 2015…but most likely it is smooth sailing for rates.”
So all the way back in April we knew the FED was in a no win situation. We wrote of an equity correction, and as expected the August dip in the stock markets put the FED on their heels. With the markets down almost 10% for the September meeting, raising rates could have fueled further falls in the market. The equity correction was short lived and has since rallied back strong, but it was enough to make the FMOC pause and maintain the course. Since the markets have mostly recovered, the September meeting would have been an ideal time to raise, and now we go into December which would not end the quarter and year well for people and businesses as they close out their books.
The FED blew an ideal opportunity in September. The range from the FMOC members is a 1-4% target rate by 2017 with general consensus of a 2.5% target. Since the FED missed the opportunity on Wednesday, and with rates currently at a 0-0.25% target and the Fed has 8 meetings next year, so then the Fed will have to hike at least every other meeting next year to stay on track and that wouldn’t give them room to skip a hike if anything concerning remerged domestically or globally.
From an academic, economic, and bubble building standpoint, (we discussed growing bubbles last week), we need to return to normalcy. From the economic health of American people and businesses we cannot digest normalized rates yet. Our editorial in April was extreme calling for below historic rates until 2020 to 2021, but we are in uncharted territory. We are risking the American economy becoming the Japanese economy of the last 30 years of bad fiscal and monetary policy.
These are the facts, China and the world economy is slowing, the rest of the world is using fiscal and monetary policy to stimulate growth. On a side note, as the United States closes in on $20 Trillion in government debt, every 0.25% increase in yield to that debt puts an extra $50 Billion of burden on the American tax payers, so though the FED maybe kicking the can down the road they are saving the tax payers money right up until the time that the policy starts costing a larger burden on the economy than it is saving.