The Federal Reserve announced no changes to the benchmark rate with only one member casting a dissenting vote. Household spending “has been growing strongly” although business investment “has been soft” and the Fed has reiterated that they expect inflation to rise to the 2 percent target. Lastly, the committee expects “economic conditions will evolve in a manner that will warrant only a gradual increase in the federal funds rate”.
Here we stand seven months since the last time the Fed raised interest rates. The economy is supposedly on strong ground, the job market has consistently improved, inflation isn’t ideal but positive and yet the Fed, who has threatened to raise rates four times this year hasn’t moved them at all and odds point to December once again. It’s become pretty clear that they only plan one raise for 2016. So why not now? Why wait for right before the election or right after? Why wait until Q4 when arguably, economic activity slows down? What would a 25 basis point raise by the Fed do to the economy?
In all likelihood 25bps does next to nothing in terms of affecting the economy. Is the Fed afraid of tightening credit markets, shrinking liquidity, cataclysmic shifts in investment and an overall major disruption to financial and world markets? Are they concerned about Taper Tantrum 2.0? If you recall Taper Tantrum refers to Ben Bernanke’s comments on May 2013 that the Fed would begin tapering back it’s $70B a month in bond and mortgage-backed securities purchase program. That comment sent bond yields skyrocketing and crushed liquidity of riskier assets. It is possible that this could happen again; although in the case of Taper Tantrum, Ben Bernanke caught the market off-guard and today the market is almost daring the Fed to raise rates. It’s certainly has been talked about enough and a very different situation than 2013.
My opinion is that if the market sees strong job figures for July and August then the Fed should raise rates in September. What happens in the rest of the world could throw a wrench in that and certainly we face front-page risk with respect to terrorists attacks, etc. The Fed is running out of time for 2016 and I believe they face greater repercussions if they don’t raise rates in 2016. As far as long term rates (or mortgage rates for that matter), they could still fall. If you recall between December of last year when the Fed raised rates and the post Brexit market earlier this month, the 10yr yield has dropped over 80bps. 80 basis point drop in rates since the last Fed raise. Today the 10yr trades at 1.52% with no current signs of breaking out of the 1.40-1.60 range.
September 21, 2016
November 2, 2016
December 14, 2016
February 1, 2017
March 15, 2017