I saw my brother at an out-of-town wedding last weekend. We usually don’t chat much about the markets, even though he’s in fixed income sales at a major investment bank. But we got around to talking about a Fed hike and he gave me a bunch of reasons why he thought the Fed would hike in September. I seem to be hearing a lot of the same arguments, so I thought I would go over some of them. The following (like everything else in the CA) is just my opinion. If you disagree, it would still be helpful to read, to buttress your own opinions.
- The Fed needs ammo in case we have another shock/downturn. This is the stupidest argument for needing to hike rates, and unfortunately for my bloodline, the first one my brother mentioned. If you had any serious concerns about a shock, why would you raise rates and potentially weaken the economy?!? Dudley pooh-poohed the idea, when he said last week that Fed has toolS available if a financial shock or foreign shock were to derail the economic improvements. I suppose this is probably what he should say, even if he didn’t have any tools, but still.
- A 25bp rate hike won’t matter (to the recovery). If it doesn’t matter, why would you change the rate? Especially NOW, when there is NO inflation and when the global economic outlook is shaky?
- The Fed is causing a bubble. Where exactly? The S&P is up 2.9% this year. I’m not crazy about firms levering up to buy back stock, but I’m not sure this has reached absurd proportions. Housing is firming, but still low by historical standards. Auto loans are high, but autos are one of the big things keeping retail sales and manufacturing up near respectable levels.
- Low rates are bad for sectors of the economy. Fischer stated that the low rates are intended to help investment (preferably physical). While there are some sectors of the economy that may do better with higher rates (seniors, banks, etc), it’s not even clear to me that the long rates would go higher with Fed Fund hikes in the short end – in fact, long rates may go lower.
- The risk management and slow trajectory argument. But I think you could have made this argument many times in the past. During this long recovery, there have been times where GDP was stronger (and on a better trajectory), where retail sales were higher (and on a better trajectory), where inflation was higher (and on a better trajectory), where wages were higher (and on a better trajectory). And we didn’t hike. Really? NOW is the “right” time you’ve been waiting for?
The only part of the economy that looks reasonable is some parts of labor (and in turn the service economy). Interestingly, the LMCI has averaged 0.4 in the last 6 months. That is not what one would call “booming.” In the 6 months prior to the last Fed liftoff in June 2004, the LMCI was 8.1. Granted this recovery has had a much shallower trajectory than the previous one. But 0.4 does not say to me that things are getting out-of-hand.
We have NO current inflation and NO prospect of future inflation. In fact, I am more concerned about deflation than aggressive inflation. I’m not saying the Fed couldn’t hike, or the data couldn’t pick up, but I don’t think they should hike. Now if the data were to turn noticeably, that would be another story. But that needs some time to develop.