The Federal Reserve painted itself into a corner…
At the March 2015 meeting, the central bank left rates as is, dialing back on projections for further rate hikes this year after a quarter point rise in December.
Instead of four projected hikes, we’re likely to see at most two, as the central bank continues on a path laid out in late 2015. Currently the Fed rate is projected to be 0.875% by the end of the year… down from 1.375% in December forecasts.
According to the CME Group’s Fed Watch, there’s just a 52% chance of a hike in July 2016. There’s a 60% chance of it happening in September… December is only a 33% chance.
But even that may be too much, too soon…
The Fed knows this -- likely panicking behind closed doors, preparing for what could happen and hoping the next hike will be well received.
They’re praying that the global and U.S. economies will improve. But as we argued in late November 2015, the U.S. and global economy isn’t ready for rate increases.
“The U.S. economy has been very resilient in the face of shocks…”
That’s what Fed Chairwoman Janet Yellen told reporters the other day.
However her actions last week tell a different story. If the economy were truly resilient and as strong as she says, the Fed would have adjusted rates higher in March.
By delaying an increase and kicking the can down the road, the Fed has admitted just how weak the U.S. economy truly is. In fact, U.S. economic growth actually slowed at the end of last year, raising the fear of another recession.
Despite the turmoil, the Fed said that the U.S. economy has been “expanding at a moderate pace” on increased consumer spending, the housing sector, and a strengthening jobs market.
While we see signs of improving housing, we don’t think unemployment and consumer spending are as healthy as the Fed believes them to be.
The headline unemployment rate of 4.9% -- expected to fall to 4.7% -- is still misleading. It doesn’t count tens of millions of Americans that gave up looking for work. In fact, if we look at the U6 unemployment rate, it sits at 9.7% as of February.
If unemployment were truly 4.9%, we would see increasing consumer spending, as well as a wage growth. We are not seeing either. Even Janet Yellen noted, “I’m somewhat surprised that we’re not seeing more of a pickup in wage growth.”
And, while the U.S. savings rate backed off from 5.5% to 5.2% in recent months as compared to the 4.5% of last year, consumers still are not spending. We can see that in U.S. retail sales, which showed a sharp downward revision in the January numbers.
January retail sales were revised to show a 0.4% drop instead of a 0.2% gain. February retail sales fell 0.1%. Such weak numbers don’t support the idea that the economy is on solid ground…
Then, of course, the Fed is still concerned about inflation, which remains below its healthy target of 2%. It’s been below 2% for four years and is expected to remain low through 2018.
Despite the rhetoric of strong growth, there are also concerns over falling imports and exports, and crumbling corporate profits. Manufacturing has been contracting, too. All of which suggests the economy is in no shape to handle tighter monetary policy at the moment.
The ISM Manufacturing index, for instance, just came in at 49.5.
While just under 50, it’s still a sign of contraction. In fact, the manufacturing sector has now shrunk for the fifth straight month – its longest recession since 2009.
If these numbers remain under pressure, they could easily derail plans for a rate hike this year.
In fact, we believe that instead of raising rates, the Fed will continue to just talk about wanting to boost them, hoping the U.S. and global economies improve. As usual, it’s a wait and see situation.
What I can tell you, though, is that even with the economy in disarray, there’s little reason to worry… or to sell everything and run to cash, as many analysts have wrongly suggested. As long as you use our time-tested strategy of focusing on pockets of strength, you’ll be just fine.