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The Long Wait For a Fed Rate Hike Continues


The Long Wait For a Fed Rate Hike Continues

The fifth FOMC meeting of the year ended this afternoon with no surprises. The FOMC policy statement had no policy changes. In fact, the statement changed very little from the June statement. The Fed continues to say that "the current 0 to 1/4 percent target range for the federal funds rate remains appropriate."

The Fed remains fairly quiet regarding clues to when its first rate hike will occur. The only clue is a slightly more upbeat view of the economy in the first paragraph of the statement. As economist Tim Duy said in his FOMC recap:

In my opinion, this represents a not trivial upgrade of their thoughts on the labor market. Job growth is "solid," unemployment continues to decline, and a much more forceful conclusion on underemployment. No longer has underutilization diminished by a wishy-washy "somewhat." It now conclusively "has" diminished. Hence, it seems like the Fed is closer to declaring victory over one impediment to hiking rates - Fed Chair Janet Yellen's concerns about the high degree of underemployment.

The Fed continues to insist that the rate hike decision will be data dependent. If the labor market continues to improve, a rate hike in September is possible as Duy concludes in his FOMC recap:

All else equal, the next two labor reports will factor strongly into the Fed's decision in September. A continuation of recent labor trends is likely sufficient to induce them to pull the trigger. Further signs of stronger wage growth would make a September move a certainty.

I’m not quite that optimistic. I’ve seen the Fed delay tightening for far too long. I still think we’ll see the hawks on the Fed vote for a rate hike before the majority on the Fed vote for it. Today, all voting members on the FOMC voted for the status quo. Not even the inflation hawk, Jeffrey Lacker, dissented. I think we’ll see Lacker be the lone vote for a rate hike before the majority on the FOMC vote for it. You can see who are considered hawks and doves on the Fed with this Reuters Hawk-Dove scale.

Future FOMC Meetings

The next three FOMC meetings are scheduled for September 16-17, October 27-28 and December 15-16 The September and December meetings will include the summary of economic projections and a press conference by Fed Chair Yellen. The first rate hike is most likely to take place at a meeting with a press conference.

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Shorebreak   |     |   Comment #1
The Fed lost all credibility a long time ago. They are unable to predict with any certainty economic conditions a few months from now let alone the next few days. If they don't raise short term rates a measly 25 basis points in September it will show the Fed is feckless and clueless. If they didn't hold trillions of dollars of U.S. debt instruments the Fed would be irrelevant by now.
Anonymous   |     |   Comment #2
>>They are unable to predict with any certainty economic conditions a few months from now let alone the next few days.

Yogi Berra:  Its tough to make predictions, especially about the future
me1004   |     |   Comment #7
The Fed is the problem for the economy now and for a long time now. A LOT of people who depend on income from their savings have been hit as hard as the depth of the Great Recession now and for most of a decade. They can't spend. The Fed wants more spending, but it has been strangling a significant part of the population -- mostly retirees, but others too -- who cannot spend for lack of any income from their savings. Instead, they have been having to spend down their principle and tightening their belts to the bone! 

Until the Fed gains at least some vague respect for the power of savers to boost the economy, the Fed is the problem. If the Fed had recognized that early on, this recession did not need to be so deep and so long -- the Fed all along had the power to boost spending in order to boost the economy, but it did not respect that.

And this fight now over probably no more than a useless 1/4 percent increase! The Fed rate should be up at 2% NOW so it can be in striking distance of actually clamping down on inflation when it starts, and it could start seriously at any time now, it already is starting to tick up. When they start that clamp down, they have to expect at least a 9-month delay before their actions actually impact inflation, and inflation can get wildly out of control in 9 months -- they can't do that with 1/4 percent increments after inflation starts taking off seriously if they are starting from 0 -- we would be risking hyperinflation. 

A 2% Fed rate will not crimp borrowing. Anyone failing to borrow at a 2% Fed rate -- which is still  very low -- is not holding back because of the price of borrowing; they are the ones who are not borrowing even at a 0% Fed rate! When they went below that mark in the Great Recession, it was even acknowledged it would have no direct impact on the economy, that it was done simply for psychological support so the markets would know the Fed would do anything possible to save the economy; it was not done with the expectation that it would directly boost borrowing. That psychological reassurance was necessary TEMPORARILY at that time, but not for the long run. That should have lasted maybe a year, no more; beyond that it simply showed a bunch of people on the Fed not even knowing what they're doing, undermining the economy rather than boosting it, because of no respect for the economic power of savers.

The Fed has been a follower, not a leader; it is merely watching the numbers to see if things fix themselves enough, and then the Fed will consider trailing behind with a long overdue rate hike, an inadequate one at that. What we needed all this time was a leader, not a follower -- the economy has suffered longer and deeper because of that. The economy has not been improving because of the Fed; it has been improving despite the Fed.
Shorebreak   |     |   Comment #8
Right on the mark me1004. The Fed is reactive rather than proactive.
Anonymous   |     |   Comment #3
The fed has become a timid puppet of the stock market.  They could have begun raising interest rates months ago, even a quarter point every 6 months.  Instead, these meetings are nothing more than "pajama parties", with the media playing it up as if it is a real strategy session. 

I gave up caring.  All savers can do is recognize that we paid for the sins of the mortage collapse and were not even given credit for bailing out the country.
Anonymous   |     |   Comment #4
My bet is that when the FED starts raising rates the robo traders (inanimate and very complex computer programs) will bring the market to its knees in a hurry. Once again, 401K's with limited access will fall before the sword. Self-directed IRA's owners will panic and run for the door. No one will want to be the last man out so it will be a frenzy. The computers will win, leaving a few crumbs for a selected few just to keep the regulators at bay. Investment advisors (some of the worst people on earth) will advise, "stay the course, stay the course" knowing full well they should have gotten you out beforehand. A 65-year old has little business speculating with their retirement funds but that's the "new paradigm" of investing. Fleece everyone, regardless of age, regardless of income without remorse.

The FED knows what will happen when rates rise and so do you. The cost of everything will rise. I know one thing for certain. The FED is always shovel-ready and they've been very, very busy. Tough luck for the folks who actually build things.
Anonymous   |     |   Comment #5
The fed is paused in waiting mode. They are simply waiting for some bad economic data or for China to implode or whatever to justify their keeping rates in the basement. The US debt is just too big to raise rates. The interest paid will shut this country down if rates were raised to "normal" levels. Most of our GDP would be to pay interest. What a mess our elected officials have made.....
Anonymous   |     |   Comment #10
What a mess the voters have made.  They are the people who choose who is in charge.
Anonymous   |     |   Comment #6
I agree with all the above comments. The Fed is boxed in a corner of their own creating. With all the criticism of China authorities manipulating their stock market, I see very little difference here at home as our market is manipulated and continued to be held aloft by FOMC policy.  Does anyone not believe that any significant decline in our market would be met with similar market supporting measures?
Anonymous   |     |   Comment #9
Gold is down, copper is down, OIL is down, Gas is down, growth is stagnant, China is down, Greece won't pay its bills yet people talk of "normal" FED rates. Folks, wake up, normal doesn't exist and it never has. There have been boom and bust periods since the beginning of time. The FED took a chance (they admitted it was unknown territory for them) and this is the consequence. Stop believing the endless hype and accept the fact that most people are NOT captains of industry or finance and, therefore, have very little influence. We voted for pandering idiots who freely spend our money, to get our vote so they can get more of our money to do to you what they have decided is in our best interest. Sadly, countless people are perfectly content with despotism in all its varied forms. That is the old normal and it's doing just fine.  
Anonymous   |     |   Comment #11
Right you are!
Anonymous   |     |   Comment #13
The Chinese stock market is very different as is the Chinese economy. The powers that be in China only allow a select few to reap enormous rewards. There are brand new modern cities in China that are without a population.
Insanity doesn't begin to describe this phenomenon, especially on this scale.
Anonymous   |     |   Comment #12
All this talk about what the FED will do is just a big waste of time. The FED can never increase interest rates. They need to keep the stock markets up at all costs. It would be devastating to pensions, annuities, insurance accounts, 401k accounts, IRAs, government investments, etc. if the stock markets dropped. It is too bad that so much of our so called "wealth" is based on the fictitious numbers of the stock markets.
Anonymous   |     |   Comment #14
I agree but only up to a point.  Use of the term "never" is not wise.  If America ever truly recovers it might become possible, even necessary, to increase interest rates in future.  I'm with you, though, in that no such recovery is currently possible.  We will know much, much more about where things are headed early in November of next year.  Until then the current malaise, and existing low rates, will surely continue.
Anonymous   |     |   Comment #15
Glad you said that again....I had almost forgotten.
Anonymous   |     |   Comment #16
Yea, must have been too dopy to respond sooner with the usual comment.
Anonymous   |     |   Comment #17
"Hey Charlie Brown.......I promise.......This time I wont pull the footall away........Really I wont!"
Anonymous   |     |   Comment #18
Gilligan's Island had a rational grasp of monetary economics.  When Gilligan and Mr. Howell find gold and flood the island in liquidity, the cost of their dinner became $740.  Since the fed started pumping the economy with trillions in 2009, inflation has run about 5 percent.  6 and a half years later this comes to a total of 37 percent added inflation.  A $10 deli sandwich in 2009 is now $14, a $15 pizza is now $20, and a $50 dinner is now $68.  Every month the fed lets inflation run, is another half percentage point added to the total.  The feds have got us into one fine kettle of fish ...  "one kettle of fish, $300" said Ginger Grant.
Anonymous   |     |   Comment #19
Hold on. Inflation is relative.

I just bought a new automobile. Same company, same model (much improved I must say). My old one was purchased new in 1998; the new one 2015. Using government CPI numbers, the price I paid today was precisely tied to the rate of inflation AND I got a MUCH better vehicle.

We went on vacation to Canada. $5000 spent in CAD cost me $3820 USD. I paid MORE for the same trip (less days actually) in 2001.

I just filled up my 500 gal. propane tank. Paid $.89 per gallon. Three years ago I paid $1.75.

I could buy my home for LESS than my 1987 purchase price, based on the CPI calculator.

I sort of think the CPI numbers aren't too bad. The problem, for many, is their income has not kept pace with inflation so they see a decline in their standard of living. That's micro-economics, not macro. Gilligan was all micro.
Anonymous   |     |   Comment #20
Finally!!  A poster who really understands inflation!  It's all relative and not the big monster so many financial advisers like to scare us about.  The proof is not in the pudding.  It's in people like yourself who are actually experiencing it.  Thanks for sharing.
Anonymous   |     |   Comment #21
Any poster, just like the Fed, can skew the figures to meet any outcome they wish.  How many people never can afford to buy a new vehicle ?  How many people can't afford a vacation, and to Canada, and take advantage of the exchange rate?  Buy a home?  Many people can't afford to pay utility bills, let alone come up  with monthly rent money!

Not that I can't afford luxuries, I can.  But I don't forget about the less fortunate who are barely scraping out an existence and say there is little or no inflation concerning the basic necessities.
Anonymous   |     |   Comment #22
If one has an expensive drug to buy/use in US, then "you" can afford to go to Canada!
Anonymous   |     |   Comment #23
We work with poor folks. We understand the problems. We offer a lot of material support. The major causes are: (1) poor education and no marketable skills and (2) death-spiral personal lifestyles involving too many children, drugs, alcohol and other destructive personal behaviors.

Until I purchased my new car, my 1998 model was one of the oldest in the lot at the food bank on a busy evening. Smokers blocked access doors as they puffed $5/day into oblivion. My $22/month flip-phone paled in comparison to the phones (and tablets) carried by many food bank shoppers.

I know a retired woman with a very average IQ who worked faithfully as a secretary for 32 years. Her top salary was $25K. No one gave her a bloody dime in more than thirty years. She has one absent child. I helped her budget and plan her expenses. She lives alone and executes the plan. No drugs, no smoking, a bottle of wine a month, regular exercise, a nice two-bedroom apartment with a view, and a respectable lifestyle is all she wants and needs. Her food budget comes in at $125/month and she could lose a few pounds. She buys used books for a buck, $4 sweaters at Goodwill (so do I as a matter of fact) and her apartment is immaculate. Her small pension and social security are more than enough...she saves money each year. Her recent balance is over $60K, most earning 2% in local CD's. In the vast majority of my life's experience personal behavior is THE deciding factor. Not always, but more often than not what you do as an individual dictates the outcomes of your life.