<OT> Jill, I honestly don't think AG has made up his mind to raise rates for sure at the next meeting. I think he is sensitive to the impact that can have on the economy. If he does raise the rates, most likely it will be by 1/4 point, not 1/2. He has said, that in retrospect, the last FED easing was unnecessary (in the series of three easings last year). Therefore, if he *does* raise rates, it will most likely be to simply take back that last easing. He keeps thinking that perhaps the economy will slow on its own - the expansion, in its most recent stage has been driven by consumer spending - that spending is not sustainable at the current level, because it is now debt spending... savings have actually gone negative, and consumers are taking on debt. That cannot go on forever; of course things are a bit more complicated, because that negative number for savings does not take into account the wealth created by the rising stock market. In fact the data is contradictory - savings are falling below zero, which would indicate debt accumulation, yet the most recent data indicates that consumer credit card debt has been falling; the resolution is that the "consumer debt" conclusion from negative savings is misleading, because while it is true that people are not saving, their spending is not coming from debt creation, but from selling of appreciating stock; over 40% of Americans have exposure to the stock market; these Americans are also the group who traditionally are most responsible for consumer spending. AG is aware of all these facts - which is why he expressed unease over the "stock market" effect on driving the inflationary pressures in the economy. He definitely would like the equity market to decline, but in an *orderly* manner - a sudden collapse of the stock market would have dire consequences for the economy, as the impact of the stock market on the economy is greater than at any time in history - the worth of all the equities as a percentage of the economy is the greatest ever.
Bottom line, AG is caught in a web of conflicting needs. What he would like best, is for the market to ease off gradually (and he's done a good job of jawboning it lower!). Employment numbers are not the biggest factor he's watching, rather it is the wage pressures. Other factors are of course world economic - are other economies recovering, and will they drive commodity prices up? What will the impact of higher rates be on the currency markets - the distance between European rates (not to mention Japanese) and American, are already substantial; raising rates would make the distance even greater.
All in all, I'm sure AG's preference is not to monkey around - the less interference from the FED, the better. However, the urge to raise rates by 1/4 point will be dependent entirely on the numbers that come out. That is why the market is watching all of them like a hawk - AG's mind is not made up, and he'll decide based on the numbers that come in.
I don't know what's behind the Rivlin resignation, and I see no percentage in speculating about it. I think we should look at the numbers carefully, and draw conclusions from that. For example, the home sales numbers are up because they are driven not by inherent demand, but by the rates hike fears themselves! People are rushing to lock in the low rates, and so that number is not meaningful.
I truly believe this whole thing is a wash - and the market is just using this as an excuse for concerns that are unrelated to the FED and rates. In plain language, folks understand that it is simply not sustainable to have the market appreciate by 20-30% annually forever, in the face of corporate growth on the order of 5-10%. Nothing grows to the sky. Valuations are historically high. Something has to give - the question is when. Nobody wants to be the one left holding the bag - so people seize on any excuse to take some $ off the table. The FED is perfect as an excuse. If they raise - wow, bond yields go up, equities down (the connection, BTW, on purely economic grounds is long outdated - I mean, who is going to say: wow, bonds pay 6% rather than 5.85%, so now I'll put my $ there rather than in the equity market... that was semi-valid reasoning when stocks were in a prolonged bear market, and bonds outperformed the index). If they *don't* raise, that too is BAD, because that'll mean the FED is asleep at the switch, and not vigilant against inflation, which is not good for stocks.
Historically, we've had a rising stock market with rates far higher than today, even if AG were to take back all 3 eases from 98. So, bottom line - this FED watch, is an excuse for other fears... valuation, sustainability of the bull market etc.
Morgan |
