The Waiting Is The Hardest Part

Surprise, surprise. The Fed isn't going to raise rates in June after all.

While the just-released minutes of the Fed's April 28-29 monetary policy meeting revealed the central bank "did not rule" out the possibility of raising rates at its June 16-17 meeting, "many participants thought it unlikely that the data available would provide sufficient confirmation that the conditions for raising the target range for the federal funds rate had been satisfied."

In other words, economic reports over the past several months haven't come close to giving the Fed comfort to start normalizing monetary policy – i.e., raising rates – without jeopardizing growth, or what little there has been recently.

In the first quarter, U.S. GDP rose only 0.2%, down from the 2.2% growth rate in the fourth quarter of 2014. But economists are now expecting that figure to be revised downward next Friday, possibly to show negative growth.

The Fed largely wrote off the Q1 drop to "transitory" factors, namely that old standby excuse, "severe winter weather." Furthermore, it said, "a pattern observed in previous years of the current expansion was that the first quarter of the year tended to have weaker seasonally adjusted readings on economic growth than did the subsequent quarters. This tendency supported the expectation that economic growth would return to a moderate pace over the rest of this year."

However, recent economic reports covering April and May just don't show a rebound building in Q2.

The Chicago Fed's national activity index remained in negative territory in April, where it has been since the beginning of the year. Industrial production fell 0.3% last month, its fifth straight monthly decline. Retail sales showed no change after rebounding a revised 1.1% in March. That makes three declines and one no change in this vital indicator over the past five months.

Consumer expectations, which the Fed had held up as a bright spot, is also on the decline, following the retail sales numbers. The University of Michigan's consumer sentiment index dropped 7.3 points in May to 88.6, its biggest decline since December 2012. That puts the barometer more in line with the Conference Board's consumer confidence index, which had been showing less-robust optimism about the economy.

On the plus side, leading economic indicators did rise by 0.7% in April, the most in nine months, but that was one of the few positive signs in recent months. Markit Economics' flash U.S. manufacturing purchasing managers' index for May, released alongside LEI, fell to 53.8 from 54.1 in April, the weakest improvement in overall business conditions since January 2014. Housing market indicators have been uneven, with some figures good, some bad.

The jobs market has also been a mixed bag. Fewer people seem to be getting laid off, which is certainly a good sign, but employers are holding back on hiring workers until they get a better fix on where the overall economy is headed.

Indeed, so fragile is the recent state of the U.S. economy that even the euro zone had stronger growth in the first quarter than the U.S.. The European Union's statistics office said eurozone GDP rose 0.4% in Q1, double the rate in the U.S.

These figures don't exactly herald any Fed move earlier than September, and barring any positive surprises, nothing is likely to be done before the end of the year.

So what happens in the meantime?

My best guess is that both the U.S. stock and bond markets will continue to move modestly higher until the economic data gives us a much clearer picture of where the economy is headed, and therefore when the Fed is likely to make a move.

In stocks, since employers are largely keeping hiring on hold for now, that will fatten up their bottom line and enable them to continue to increase dividends and stock buybacks. If they're not going to invest money in their own companies, they may as well share it with their investors.

In bonds, I would expect long-term rates to remain stable or to ease a little. Yields on U.S. Treasuries are still wildly out of whack with comparable foreign sovereign bonds. The yield on the 10-year U.S. note is now at about 2.20%, compared to less than 0.70% on German bunds. I would expect them to move closer together, with German yields rising and ours falling.

Unfortunately, until monetary policy returns to normal, we will continue to be at the whim of the Fed. And that means that bad news will be good news and vice versa. If the economy continues to tank, that will be bullish for financial assets when in normal times the exact opposite should happen. But if things start to improve, get ready to put your exit strategy into play, if you haven't already.

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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.