FYI: How on earth did the media fail to trumpet the good news from the BEA last Thursday and Friday from the rooftops? If you read The Wall Street Journal, you would never know about the record-breaking results for all measures of corporate profits. You would certainly not realize that, after several previous records that have all been revised away, we finally saw a record for real disposable personal income set in July. That is huge and it should last this time, as the data have been creeping steadily toward this record for some time. What all this means is that when the FOMC meets on September 16 and 17, they will be looking at a US economy in which more people are employed than ever before, earning more money than ever before, producing more goods and services than ever before, and with personal consumption expenditures and corporate profits at the highest levels ever seen. If that is not a prescription for finally raising the Fed Funds rate, then I can’t imagine what it would take to get them to move.
Regards,
Ted
http://www.ritholtz.com/blog/2015/09/jim-smith-speaks/print/
Comments
Professor Smith forecasts a likely Fed funds rate increase in their mid-September meeting based on encouraging recent US macroeconomic performance data updates and revisions. He certainly cobbles together a large body of data to support his forecast.
But forecasting is risky business. Much research suggests that forecasters can’t forecast. Jim Smith has accepted that risk. In addition to his projection that the odds of a Fed rate hike are high, he also concludes that the economics support a strong stock marketplace.
Both forecasts are far from a certainty. His forecasts do not address the primary mission assignment of the Fed charter, and do not allow for a behavioral decoupling of the stock market from the economy.
The number One mission assignment of the Federal Reserve System is “conducting the nation's monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates.”
That mission translates into controlling for low inflation and to minimize unemployment. Today, inflation is near zero, and although unemployment shows healthy recovery signs, it is still too high in most geographic areas. These data should signal reluctance on the part of the Fed to risk an increase in interest rates. Conflicting data almost always exist; pick your own poison.
The danger of disrupting a fragile economic recovery overwhelm any perceived benefits from a rate increase. A rate increase is simply not warranted at this juncture. The FOMC will not duplicate the mistakes they made in the late 1910s and 1920s. The current FOMC governors remember those hard lessons.
I do agree with Professor Smith that “the US economy is doing pretty darn well!” If the marketplace were totally logical and rational, stock prices should increase in proportion to corporate profits, which are at record highs. But who knows how the herd will respond to peripheral world events that should not have a major impact on those profits?
Running with the herd is comfortable, and is the right action most of the time. But at some point, especially in the investment world, a breakaway is warranted. The challenge is to identify that separation point. That’s not an easy job.
As Warren Buffett said: “ Be fearful when others are greedy and greedy when others are fearful”. John Maynard Keynes added: “… victory, security, and success are always to the minority and never to the majority. When you find any one agreeing with you, change your mind.” Implementation of that sage advice is yet another matter. Good luck on doing it.
I try very hard to isolate myself from the forecasting game. My spotty record is similar to a fair coin toss. Generally, when Professor Smith speaks, I listen. But, on this occasion, I tend to discount Smith’s Fed rate hike projection, and tend to accept his favorable perspective on our stock market.
What do you think?
Best Regards.
That small nudging of rates would let the Fed get itself on the move towards a more "normal" interest rate level. And it would release the markets from their fixation about "when the Fed will act" while also providing reassurance the Fed is unlikely to take actions that will cause the domestic economy to self destruct. There are 10 more meetings between now and the end of 2016. During that time, the Fed could very gradually continue to raise the rate if economic conditions continue to improve.
Just a thought.......
You and I are on the same page here. This likely happens far more often than either you or I would believe.
Investors do indeed hate uncertainty, but since investing is all about guesstimating future performance, uncertainty is always a dominant factor in the investment universe. The FOMC adds to that uncertainty 8 scheduled times each year.
Almost always, the FOMC, by design, uses carefully selected wording to obscure their favored tendencies. That does more harm than good to an especially anxious marketplace. Like you, I want decisive leadership.
I recognize that the FOMC has a difficult task since their several policy goals frequently conflict with each other, and the existing economic models (Keynesian, Austrian schools) often advocate divergent policy strategies. It is a tough call, but that’s exactly why this 12 member distinguished group was chosen for the job. Now, just do it.
The Committee frustrates us with their prevarication. Perhaps they fiddle while the markets burn?
The danger is that “If you don’t know you’re going, you’ll end up someplace else”. Or equally likely, “In any moment of decision, the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.” The first quote is from Yogi Berra, and the second from Theodore Roosevelt.
My patience is running thin.
Best Wishes.
@MJG- Anyone who values the work of Will & Ariel Durant is OK in my book.
Regards-