Was May's better-than-expected jobs report strong enough to convince the Federal Reserve to start interest rate liftoff in September?
Based on the market's reaction on Friday, the answer sure looks like yes. Yields on long-term U.S. Treasury bonds spiked to their highest levels since last October, and stocks were mostly lower.
But let's not carried away with one number and one report. Certainly the data-paralyzed Fed won't. If we get three solid months of positive economic statistics, then I’ll think there's a chance – albeit a slim one – the Fed will make a move in September. Until then, we'll have to wait and see.
Notice I've already written off next week's Fed meeting as the first interest rate increase. While the minutes of the Fed's April 28-29 monetary policy meeting "did not rule out" the possibility of raising rates at the June meeting, it was "unlikely" that economic data would justify doing so by then. Nothing's happened in the meantime to change that.
But even if there is a huge snapback in economic activity following the dismal first quarter, there is no way the Fed, which has worked so hard to telegraph its intentions months in advance, is going to raise rates so soon after it practically guaranteed that it won't.
But I'm still a long way from being convinced that the Fed will actually start the normalization process as early as September, regardless of what happens between now and then.
There is simply too much pressure on the Fed, both from the market and the political realm, to continue doing nothing. In short, the number of people and institutions that benefit from zero-percent interest rates, and the amount of influence they can exert, far outnumber and outweigh the people who want the Fed to start getting things back to normal.
Who benefits from the status quo? Let's see: The Treasury Department, large corporate borrowers, stock and bond investors, consumers who want to buy or sell houses, consumers who want to purchase a new car or refrigerator (and therefore the manufacturers and dealers who want to sell them one). Who benefits from higher rates?
Retirees and other people who live on the interest from their bank accounts and certificates of deposit. There really isn't much of a contest here.
Last week another powerful voice added its two cents to the chorus against normalization.
The International Monetary Fund urged the Fed to "remain data dependent and defer its first increase in policy rates until there are greater signs of wage or price inflation than are currently evident." Based on the fund’s revised economic forecast, which cut U.S. growth expectations for this year to 2.5% from 3.1%, it called on the Fed to postpone liftoff "into the first half of 2016."
I suppose the IMF and its managing director, Christine Lagarde, have a right to voice their opinions, even if some would consider last week's statement blatant interference in the American political process.
The real problem with that is that American policy makers often wind up listening to our supposed European betters. After 225 years of independence and 70 years of superpowerdom, you would think we would have thrown off the notion that Europeans are just somehow smarter and wiser than we are, two centuries of evidence to the contrary. Yet, that isn't the case.
Indeed, the immediate reaction in the bond market last week after the IMF announcement indicated that it thinks the Fed will bow to that pressure. The bond market, both in the U.S. and globally, had been in virtual freefall prior to the IMF's announcement after European Central Bank president Mario Draghi made the pronouncement that the markets should get used to volatility (well, duh). That decline, which drove the yield on the German 10-year bund to an even 1.00%, immediately stopped after the IMF gave hope to the many who want continued Fed stasis.
I suppose my bigger concern – hopefully implausible, but you just never know – is that the IMF is really trying to drag the U.S. into a greater and more visible role in the Greek bailout talks, which got a lot more serious last week. On the surface, we have no role to play in that drama, but when has that ever stopped Europe from dragging us into their crises?
Last Friday Greek Prime Minister Alexis Tsipras called the proposal from the country's international creditors "unrealistic" and "a bad negotiating trick," just a day after he said a deal was "within sight." Greece also notified the IMF that it was deferring a 300 million-euro payment due last Friday and "bundling" it with three more payments totaling 1.5 billion euros due at the end of June.
That certainly raised the heat on Greece's creditors to give Athens what it wants, which is a continued financial lifeline without having to do anything in the way of reform. As that payment deadline draws closer, rest assured we'll hear lots of warnings about how the world as we know it will end if Greece isn't forced to stay in the euro bloc.
Then there is the bogeyman of Vladimir Putin waiting in the shadows. Will he come to Greece's rescue? And can the U.S. sit idly by if he does?
All the more reason for the Fed to sit and wait.
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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.
This economy still needs stimulus. With the fiscal side crippled by right wing obstructionism, the only game in town is the Fed. The Fed would be imprudent, to say the least, to start raising interest rates at a time when jobs are still paying less than a living wage in most sectors.
"I suppose the IMF and its managing director, Christine Lagarde, have a right to voice their opinions, even if some would consider last week's statement blatant interference in the American political process."
Sure, because America never interferes with other countries political process.