By all accounts, the Fed is ready to act and raise rates by at least 25 basis points, as we noted in late November 2015. Unfortunately, as we also noted, it was far too early for them to do so…
The headline unemployment of just 5% masked a labor market much weaker than reports suggested at the time. The tens of millions of unemployed Americans, and millions that have simply given up looking for work weren’t counted properly.
If the headline number were true, we would have begun to see rising consumer spending, as well. But as we were reminded in October, consumers weren’t so eager to spend. In fact, U.S. retail sales rose much less than expected for the month, amid surprise declines in auto sales.
We would have seen a move to the Fed’s healthy inflation target of 2%, too, as well as improving wage growth… All of that should have forced the Fed to reconsider its rate decision, as we argued.
Yet, the Fed raised interest rates anyway, sending the markets down 2,000 points in weeks.
While the Fed is not likely to raise rates at its next meeting this week, it’s still likely to raise rates a couple more times throughout the year. But our argument against doing so still remains the same.
In fact, it’s far too early to raise rates at all, given heavy concerns over the global economic slowdown.
While the Fed can always argue that ongoing strength in the labor market gives it reason to raise rates multiple times this year, the headline unemployment number of 4.9% is still misleading. It still leaves out the millions that gave up looking for work…
In addition, inflation is still under the Fed’s healthy target of 2%.
It all puts the Fed in a bad spot.
What we’re likely to see this week is a hint of a rate hike by June 2016 with a potential signal of two to three hikes, down from four with further improvements in the global economy and inflation. But it’s a wait and see.