Same Old Song and Dance From The Fed Re Rate Hike Policy
The Federal Reserve ended its two day meeting yesterday and concluded that while the economy was ‘picking-up’ and consumer spending ‘growing strongly’, they did not nudge interest rate up even a quarter of a point. The decision not to raise rates was seven in favor vs. three against, indicating there is dissent on the Federal Open Market Committee (FOMC), a rarity.
When IS the Appropriate Time To Raise Rates?
The Federal Reserve has been threatening not only to raise interest rates for more than two years, but to embark on a gradual pace of increasing them. The Federal Reserve has raised interest rates just once in ten years. The last interest rate hike was 1/4 of a point in December 2015.
The Fed statement indicated that the reasons for deciding against a rate hike were that ‘business fixed investment has remained soft [and] inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports’. Given the low inflation readings and inflation expectations of the Fed member, they decided not to raise rates.
The Fed decision not to raise rates has confounded market participants. If the economy is as strong as the Fed claims it is, with the job market near full employment and an unemployment rate of just 4.9% and ‘solid’ consumer spending, why not raise interest rates? Fed Chair Janet Yellen and most members have all spoken of the efficacy and/or need to raise interest rates. Despite the talk rate hikes don’t come.
Politics, Markets and the Specter of a Trump Presidency
After the Fed released its statement not to raise interest rates, Ms. Yellen held a press conference where she was asked if the Fed was reluctant to raise rates, or conducts monetary policy with an eye on political implications. Ms. Yellen emphatically stated that politics do not form a part of the FOMC deliberations.
Perhaps, the Fed’s reluctance not to raise rates stems from what happened the last time the Fed raised rates at the end of December 2015. In January 2016, the U.S. stock market had the worst January ever! The carnage in the stock markets did not cease until the Fed backed away from statements that there would be multiple rate hikes in 2016. Indeed, as a result of NO rate hikes in 2016, all three major U.S. stock market indexes (Dow Jones, S&P and Nasdaq) have hit all time highs.
A rate hike, unless coupled with language that no more were forthcoming, would probably send the markets crashing again. Any such language, however, would undermine the view that the reason the Fed was raising rates was because the economy needed the rate hike and could absorb it- if not why bother raising rates at all? A market in severe decline does not bode well for the incumbent administration or its nominee Hillary Clinton.
We can take Ms. Yellen at her word that politics do not enter into the FOMC deliberations. Republican Presidential candidate Donald Trump has said that the Fed has kept interest rates low for the benefit of the current administration and that Ms. Yellen should “be ashamed of what she has done to this country”. If Ms. Yellen would like to stay on as Fed Chair, and there is no indication that she is tiring of the position and seems to enjoy it, a new administration may find her reappointment in jeopardy. Perhaps, job preservation has something to do with the Fed’s reluctance to raise interest rates. Ms. Yellen’s appointment as Fed Chair ends on February 3, 2018.
A rate hike before the election and subsequent market correction or crash could tip the scales in favor of Mr. Trump and seriously harm the reappointment of Ms. Yellen as Fed Chair.
This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.