It was one of the worst financial moves ever made…
For the first time in nearly 10 years, the Federal Reserve raised interest rates by 0.25% -- a sign the central bank was confident about the strength of the economy and its ability to handle higher borrowing costs.
But it was the wrong move. The economy wasn’t prepared.
Global stock markets have plunged since the decision.
The Dow lost 9%. The Shanghai Composite fell 20%.
Oil plummeted to a recent low of $27.56.
Yet, this could have all been avoided if the Federal Reserve paid attention.
Normally the Fed raises the interest rate when our economy is growing too fast, as higher rates usually restrain growth. So why did they raise the rate at this time?
The U.S. economy certainly is NOT growing too fast. In fact, the economy might be in the process of slowing down once again. We think it’s very strange that such a decision to raise rates would happen when most of the major world economies are slowing, and their banks are lowering rates.
We were far too early for an interest rate hike.
If the Fed were correct about U.S. growth, our retail and manufacturing numbers would be stronger. Inflation targets would be in range.
Corporate America would not be cutting jobs, as it has.
Headline unemployment of just 5% has masked a labor market much weaker than reports had suggested. Tens of millions of unemployed Americans and millions more that had given up looking for work weren’t properly counted, as we noted on November 30, 2015.
If unemployment were truly 5%, we would have seen inflation nearing the Fed’s healthy inflation target of 2%. Instead it’s a paltry 0.7% for 2015.
We would have also seen a much larger increase in consumer spending.
In fact, for full-year 2015, retail sales were up just 2.1% as compared to the 3.9% in 2014 -- the weakest showing since the recession of 2009.
Anemic consumer spending is a big problem.
Consumers are worried. In fact consumers haven’t spent their energy savings, instead opting to save it, pushing the U.S. savings rate to 5.5% from 4.6% a year earlier.
The Fed had no business raising rates with a slowdown in the economy, inflation well below target, lower corporate earnings, a strengthening dollar, worsening global economies, and declines in commodity prices.
Yet, here we are…
But don’t expect the Federal Reserve to admit its error – or even acknowledge it.
At the moment, if the Fed left interest rates at just 0.25% that would be okay. But consensus estimates tell us the Fed could raise rates another four times in 2016.
While it’s very easy to look back and say, “I told you so,” we think the writing was on the wall. We spent months warning about the economic issues and why the Fed should not raise rates.
However, if the Fed continues to raise the interest rate this year as expected, we could have a very challenging market.
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