Eric Rosengren, the president of the Federal Reserve Bank of Boston, singlehandedly spooked the financial markets last Friday when he commented that “a reasonable case can be made” for the Fed to start raising interest rates soon, which traders and investors interpreted to mean as early as next week’s FOMC monetary policy meeting.
“If we want to ensure that we remain at full employment, gradual tightening is likely to be appropriate,” Rosengren said. “A failure to continue on the path of gradual removal of accommodation could shorten, rather than lengthen, the duration of this recovery.”
While I certainly don’t have any issue with what Rosengren said – I think the Fed should have started raising rates two years ago – I’m a little puzzled what exactly he said that put the markets to flight. He didn’t seem to say anything that other Fed officials, including Janet Yellen, hadn’t also said periodically recently, plus he didn’t offer any imminent schedule for raising rates. Yet that was apparently enough to get stock and bond traders to bail.
Sometimes that happens: traders and investors are simply looking for an excuse to sell or buy, and some innocuous comment by someone, even if it’s been said before, is enough to push everyone over the edge. So I wouldn’t read anything more into it than that.
In any event, I wouldn’t be fooled by the selloff his comments appeared to have prompted. I still don’t feel the Fed members have made the case to themselves that they are ready to start tightening monetary policy, whether it’s next week or next month or sometime after that.
Here are my top five reasons why I think the Fed won’t make any bold moves at next week’s meeting, and may not until December, if then.
It’s the economy, stupid: Fed officials, led by Yellen, have stressed over and over again that any decision they make will be “data dependent,” meaning the state of the U.S. economy will dictate what they do.
Economy strong, rates go up; economy weak, rates stay low. That has been the one, if only, consistent mantra the Fed has been saying for the past year or so. And so far, economic indicators have yet to start flashing an unambiguous set of green lights to move forward.
We have only to look at the August jobs number and Institute for Supply Management’s most recent indexes for September. We can all agree the first half of the year the economy was weak – the GDP numbers tell the story. But then as we entered the second half it looked like we had turned the corner. The June and July jobs numbers were much better than expected. But then the August report came in well below expectations and well under the previous two months.
Other economic indicators appeared to be showing strength entering the second half, too, but then the ISM numbers for August came out, which showed a huge drop-off. The non-manufacturing index, which tracks most of the economy, dropped more than four points to 51.4, its lowest reading in more than six years, while the manufacturing index fell more than three points to 49.4, the first time it had fallen into contraction mode since February. I strongly doubt the Fed will move after reports like that.
Monkey see, monkey do (or don’t): As long as the Fed’s main global counterparts in Frankfurt, London, Toyko and Beijing are committed to the opposite monetary policy strategy – i.e., lowering rates and loosening monetary policy – the Fed just will not feel comfortable being the lone marcher out of step with the rest of the parade.
It’s never the right time: Time and time again we’ve seen the economic numbers play out to the Fed’s liking at least temporarily, only to have the central bank hold its fire for some other reason, whether it was weakness in the Chinese economy, turmoil in the Chinese financial markets, Greece, Brexit, whatever. There’s always something going on somewhere that gives the Fed pause until the crisis of the moment passes, but then the next crisis develops. Will North Korea’s latest nuclear test last week provide the excuse to do nothing at next week’s meeting?
The election: We are now in the homestretch to the election. Despite comments from some Fed officials that they won’t let the election dictate the timing of any decisions they may make, that’s just difficult to believe. Having produced a track record of not making decisions based on outside events (see previous paragraph), the Fed is certainly not going to make a decision on rates in the shadow of arguably the biggest event of all. This goes double for the November meeting, which takes place less than a week before the vote.
It ain’t got the guts: This point consolidates the previous four, which is that the Fed simply lacks the will to make decisions and always finds a reason to dawdle. While it’s fine for individual Fed members to make speeches and other public utterances stating their personal beliefs at the moment, which I assume are sincerely held, those aren’t the same thing as casting actual votes at FOMC meetings. And with the exception of one brave soul at each meeting – usually Esther George of the Kansas City Fed – most Fed members simply aren’t ready to take the next step.
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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.
