Fed Has Plenty of Excuses Not To Do Anything Soon

If you're among the vanishing minority of people who still think the Federal Reserve is going to start raising interest rates in June, the latest reports on the U.S. economy and events in Europe and China should disabuse you of that farfetched notion.

The proportion of economists predicting the Fed will wait until September to raise rates rose to 70% in an April 3-9 survey, more than double the figure from the previous month. That ratio has likely gotten even wider following the news of the past week, although I think it will be well after September before the Fed starts "normalizing" monetary policy.

Let's look at the U.S. economy first, where indicators continue to come in soft.

• On Monday, the Chicago Fed's national activity index continued in negative territory for the entire first quarter, falling to minus 0.42 for March. February's reading was revised downward to negative 0.18 from minus 0.11. That reduced the average for Q1 to minus 0.27.
• Last Friday, leading indicators for March rose a less than expected 0.2%, while February's figure was revised downward to 0.1% from 0.2%.
• Housing starts for March rose a weak 0.2% to an annual rate of 926,000, well below expectations of more than one million. Versus a year ago, starts are down 2.5%.
• Industrial production dropped 0.6%, double the decline analysts were expecting.
• The one decent report for March was retail sales, which rose 0.9%, the first increase in the past three months and the biggest monthly increase in a year. But that rebound was less than the 1.1% increase analysts were anticipating. Moreover, the volume of sales remained lower than it was last November.
• The Fed's own Beige Book said the economy in February and March was improving only "modestly" or "moderately" across most districts, with two simply holding "steady." There were 44 variations of the word "weak" in the report; by way of comparison, the January 14 book had only 17 such mentions.
• The only indicator that might give the Fed some reason to feel comfortable raising rates soon was the March consumer price index, which showed a 0.2% rise, 1.8% on a yearly basis. But that's still below the Fed's 2% target.

The ratio of disappointing economic reports relative to positive ones recently is greater than at any point in the past six years, according to Bank of America Merrill Lynch.

These lousy to ho-hum reports are bad enough to give the Fed breathing room to avoid an early rate rise (if you can call a delay that’s been going on several years "early.") But the latest news from China and Greece gives the Fed more than enough of an excuse not to do anything for several more months.

After their markets closed last Friday, Chinese regulators tried to take some air out of the country's stock market bubble, which has pushed stock prices up more than 111% in the past year and 33% so far in 2015. They clamped down on margin trading and made it easier for investors to short stocks. That sent stock prices spiraling downward in Europe and the U.S.

But then before the markets opened on Monday, the People's Bank of China announced it would cut banks' reserve requirement by one percentage point, its second reduction in less than a quarter and the biggest since December 2008.

What created the Chinese stock bubble in the first place? Expectations that the bank would need to stimulate the economy, which in the first quarter grew at an annualized rate of 7%, down from the 7.3% pace in the previous quarter and the slowest pace since the fourth quarter of 2009 and the second weakest since 2001. That followed an earlier report that exports dropped 15% and imports fell 12.7% in March.

Then, when all else fails, we have Greece. The country's official lenders, including the European Central Bank and the IMF, are supposedly holding firm against granting the country more time to get its act together before they will advance it more money. That has created a panic that Greece will either default, leave the European currency union, or both.

Then we have comments from Fed officials themselves.

Atlanta Fed President Dennis Lockhart said he "would lean to a little later versus a little earlier" to raising rates, citing the "heightened uncertainty about the track the economy is on." Cleveland Fed President Loretta Mester said, "A gradual path is justified because there continues to be uncertainty about long-run growth rates." Boston Fed President Eric Rosengren said "incoming data would need to improve to fully satisfy the two conditions for starting to raise rates."

With so many issues like these to consider, the Fed is not going to start normalizing interest rates if it believes it could trigger an unpredictable (i.e., negative) reaction in the financial markets (as happened in China) or make the economy even worse than it already is. Some people think that's exercising good judgement. Others think it's just an excuse not to do what it should be doing.

Visit back to read my next article!

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.