Peak Debt, Peak Doubt, & Peak Double-Down
Time to Hike Rates
It makes little sense to me why the market is only pricing a 6% probability of a rate hike at the October meeting, 30% for December, and only a near 50/50 probability all the way out to March 2016. The statutory mandates of the Fed as stated in the Federal Reserve Act are “maximum employment, stable prices, and moderate long-term interest rates”. All three have been fully realized.
The unemployment rate is 5.1% (full-employment). Core CPI has been stable for years and printed 1.9% yesterday; remarkably close to the Fed’s self-imposed target of 2%. For a few years, Treasury rates have been stable at near-historical low levels. In addition, the 4-week moving average of Unemployment Claims fell to its lowest level since 1973. The most recent employment report was a bit weaker than expected, but it fell within a standard margin of error. Yet, the Fed continues to remain at the emergency rate of 0.0%.
At the September meeting, the FOMC talked up the economy, but refrained again from hiking rates, citing “international developments”. By making this decision, the Fed has to be careful it does not also provide an ‘emerging markets put’.
As the October meeting approaches, international developments have settled down. Emerging market stocks indexes and currencies have bounced since the September FOMC meeting. Chinese markets in particular have calmed down and have traded higher. The US stock market is higher. The trade-weighted dollar is lower. Credit spreads are tighter. The arguments for a hike at the October or December meeting should have increased not decreased.
The recalibration in rate hike probabilities could be the result of the “data dependent” language which has never been adequately defined. It is suspect to believe that monetary policy for an $18 trillion complex global economy is being determined by a backward looking piece of monthly economic data.
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