Here we go again. I hate to sound like one of those tinfoil hat wearing conspiracy nut jobs, but it is hard to dismiss the correlation. At the previous FOMC meeting on September 17th, stock markets were struggling. Credit spreads were blowing out. Financial conditions were tightening. Global markets were looking shaky. It was not the environment the Federal Reserve wanted to put through the first interest increase in nine years. So they took a pass.
Since that decision, the stock market has rallied, credit spreads have tightened (somewhat), financial conditions have improved, and the global markets have stabilized. Nothing like a little bit of a rally to give the Federal Reserve the courage to once again talk about tightening policy.
And that’s exactly what the FOMC did at yesterday’s meeting. In a surprise move, the committee cleared the decks for a December hike. As reported by the WSJ’s Jon Hilsenrath:
Federal Reserve officials Wednesday kept short-term interest rates unchanged near zero, but opened the door more explicitly than they have before to raising rates at a final 2015 meeting in December.
In a statement following a two-day policy meeting, Fed officials suggested they had become less concerned in recent weeks about turbulent financial markets and uncertain economic developments overseas.
Huh? Markets stop going down, and now all of a sudden a rate hike is back on the table? Doesn’t that imply the only reason you didn’t raise it last time were because stocks were selling off? Isn’t the Federal Reserve supposed to tune for the economy, not the market? And even if you are tuning for the market, aren’t you flip flopping so much Dennis Gartman is calling you a pansy?
The Federal Reserve has about as much credibility as Lamar Odom’s claims he was at the Las Vegas brothel to watch some movies with the nice young ladies, and no, there is absolutely no way he mixed illicit drugs with booze and “performance” enhancing pills.
The last shreds of Volcker inspired dignity have finally been shed. The Federal Reserve is not even pretending anymore they are doing anything except responding to the month to month movements in the markets.
The economic releases during the past month have been tepid and consistently unimpressive. Whether it is the Dallas Fed Manufacturing Activity coming in at –12.7 versus an expected –6.5. Or the Durables Ex Transportation release stinking up the joint with –0.4% versus the consensus 0.0%. How about Monday’s terrible Consumer Confidence Index reading of 97.6 as opposed to the anticipated 102.9? Although I am cherry picking the especially bad ones, the economy has not rebounded in the past month and a half since the last FOMC meeting.
The Bloomberg Economic Surprise index shows the macro economic numbers continue to lag considerably below expectations. The Fed thinks the economy has improved over the past month and a half – I don’t see it.
Nor do consumers.
The Bloomberg US National Economy Expectations Diffusion Index measures consumers’ opinions about whether the national economy is getting better, or worse. The index has slipped again this month, to a new one year low.
There is absolutely no way that if the Federal Reserve were truly tuning for the economy, their statement would be at all different. In fact, you could argue that the recent slowdown gives them an excuse to be more dovish.
Yet since they are not managing an economy, but a market, their policy has suddenly shifted, and a December tightening is right back on the table. Puuhhhleaze…
Here is what I think will happen. Either the market will not believe them, and we will continue rallying. Then if the Federal Reserve actually pulls the rip cord in December, the markets will collapse as the little boy cried wolf so many times, the villagers became convinced wolves were extinct. The alternative scenario is the markets take the Fed at their word (why?), and we once again return to the old; US dollar up, commodities down, emerging markets lower and the eventual slumping of American equities. I am aware that yesterday seemed to be neither. The “rate rise certainty is good for stocks” crew was back in full force. But I call bullshit on that one.
The only way the US economy will be able to handle a rate hike is if the Fed is completely behind the curve. The Federal Reserve keeps trying to get out ahead of it. In this day and age of massive over indebtedness and the difficulties with a balance sheet recession, leading rates higher is a recipe for disaster.
Lamar Odom was over confident in his ability to keep going through his wild week of partying. I suspect the Federal Reserve Board is also overestimating the economy’s staying power. I doubt it will be long before they too are reaching for a little “help.” Let’s hope they are better at managing it than Lamar…
Thanks for reading,