The Federal Reserve painted itself into a dangerous corner.
At the April 2016 meeting, the central bank again left rates as is, offering very little guidance for when they may raise rates again.
While Dallas Federal Reserve President, Robert Kaplan, wants to raise interest rates as soon as June or July, that may not be justifiable.
In fact, as we’ve argued since late November 2015, the U.S. and global economies are not prepared for higher interest rates.
U.S economic growth, business investments, and consumer spending have all slowed.
The U.S. economy grew at its weakest quarterly pace in two years, as consumers and businesses cut back spending.
GDP expanded just 0.5% in the first quarter of 2016. And, according to the New York Fed, GDP has to expand 3.8% in the second half of this year for us to hit the full-year 2.2% forecast.
Also, while the central bank claims improving unemployment news, the data fails to support it. In fact, after examining the U6 – which counts people that have exhausted their unemployment benefits and stopped looking for work – true unemployment is 9.9%.
U.S. retail sales fell last month, as consumers cut back on auto purchases – a sign of consumer caution. Sales at retail stores fell 0.3% to $446.89 billion in March 2016.
Sales have now fallen or remained flat for each of the first three months of 2016.
That tells us consumers are saving rather than spending…In fact the U.S. savings rate now sits at 5.4% -- a high we haven’t seen since December 2012.
In the meantime, homeownership rates fell to the third lowest point on record – another strong indication that poor finances and the overall health of the economy have greatly impacted the U.S. consumer.
According to the Commerce Department, homeownership fell to 63.6%, which marks the third lowest figure since the 63.5% low recorded in 2015.
So, is a June 2016 Rate Hike a Possibility?
Unless we begin to see substantial improvements in the U.S. and global economic landscape, my opinion would be no. We’re still not ready for a hike. AND, in my opinion, it would be detrimental to the health of the global community.
Complicating matters a bit more for the bank is the presidential election in November.
Historically, the Fed tries to steer clear of raising interest rates during an election year.
Despite the Fed’s argument for signs of improvement, we’re hard pressed to find many. In fact, even U.S. corporate profits are now on pace for the third straight quarterly decline on the heels of an energy slump and crumbling global growth.
Apple for example just reported its first decline in quarterly revenue in 13 years, thanks to falling smartphone sales in China. In fact, Apple posted a 13% drop with China accounting for 58% of that decline, according to The Wall Street Journal.
All of this news could derail plans for a rate hike this year.
We still believe the central bank will not act on the hike, instead opting to just talk about it, with a hope that the U.S. and global economies will eventually improve. Unfortunately, we’ll have to wait-and-see what the Federal Reserve says at its next meeting.
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