Will Tuesday’s GDP upgrade to its fastest growth in more than 10 years nudge – or push – the Federal Reserve to raise interest rates earlier than Janet Yellen recently signaled, i.e., no earlier than the first quarter of next year?
Alas, probably not.
The final revised estimate for third quarter GDP showed the economy growing at a robust 5% annualized rate, the fastest pace in 11 years. That was far higher than the previous estimate of 3.9% and well above both the 4.3% rate the Street was looking for as well as the most optimistic individual forecast of 4.5%. It was also up from the second quarter’s growth rate of 4.6%.
Ninety minutes later, the Commerce Department came out with another report that showed personal spending rising 0.6% in November, the most in three months, while personal income gained 0.4%, the strongest pace in five months.
A week earlier, the Securities Industry and Financial Markets Association predicted that GDP growth would hit 3% next year, which it says “would be the strongest growth in nearly a decade.”
If this latest batch of strong economic news still doesn’t convince the Fed that it should start raising interest rates sooner than it indicated only a week before, we can only conclude that the Fed has lost sight of its statutory mandate, namely to “foster maximum employment and price stability.”
Instead, it has become how to best finesse its extrication from its near-zero interest rate policy and start raising rates without setting off a giant market selloff. So the easy thing to do, as most other major decisions are made in Washington, is to do nothing and deal with it later, whenever that is. Which of course by then the problem will have grown much worse and much more difficult to deal with.
At its FOMC monetary policy meeting the week before, the Fed said that it “judges that it can be patient” in normalizing monetary policy, adding that “it likely will be appropriate” to maintain its near zero target rate range for a
“considerable time.” At her post-meeting press conference, Fed Chair Janet Yellen said she expects the Fed to maintain that policy “for at least the next couple of meetings,” or likely not before the second quarter.
But many market prognosticators expect the Fed to wait until well into the second half of 2015 before raising rates, if not until the end of the year, if not sometime in 2016. Indeed, SIFMA said that none of the respondents to its Economic Advisory Roundtable survey expects the first hike in the federal funds target rate before the second quarter of 2015.
But are they saying that because that’s what they think will happen, or because that’s what they want to happen?
Obviously, the longer the Fed keeps interest rates at zero, the stock market party will continue. The markets rallied after the Fed announcement, and again after the GDP report, pushing the Dow to its first close above 18000.
But the bond market was telling a different story. The 10-year Treasury note dropped nearly a full point, raising its yield by 10 basis points to 2.26%, its highest level in two weeks. More apt, perhaps, the yield on the two-year T-note jumped eight bps to 0.75%, up from just 0.31% a little over two months ago and its highest level since May 2011. In other words, the markets can raise interest rates regardless of what the Fed does. At least some people think we are on the verge of a significant rate increase.
Do I want the market to crash? No, of course, not. I want stock prices to continue to rise forever, without a break, and never stop. Who doesn’t? I also want the Mets to win the World Series every year, the Jets to win the Super Bowl, and to be able to retire tomorrow.
But we don’t live in that kind of world. I want the markets to return to reality as quickly as possible. It’s time.
As one of my favorite economists, Stephen S. Roach, a faculty member at Yale University and former chairman of Morgan Stanley Asia, wrote in a recent column, “What do independent central banks stand for if they are not prepared to face up to the markets and make the tough and disciplined choices that responsible economic stewardship demands?”
By waiting longer, the Fed is planting the seeds of a market downturn that will make 2013’s “taper tantrum” look like a minor dip. Then I guess it will have to step in with another round of monetary easing to ease the pain. And create yet another crisis.
Visit back to read my article next week!
George Yacik
INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
