The Trend

The Real Reasons Why the Fed Did Not Raise Rates

The U.S. economy is just not ready.

Despite three dissenting opinions for an interest rate hike this week, the Federal Reserve left interest rates unchanged at historic lows. 

In fact, the group noted, “The committee judges that the case for an increase in the federal funds rate has strengthened but decided, for the time being, to wait for further evidence of continued progress toward its objectives.” 

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At the same time, they noted that the case for a hike – perhaps at December 2016 meeting – had strengthened, paving the way for a 25-50 bps hike.

But we don’t believe that’ll happen.  In fact, at the moment, there’s only a 44.7% chance of a hike later this year.

Its simply more talk from a group that has done nothing more than paint itself into a corner with no real way out.

If the group were confident, it wouldn’t have cut GDP or unemployment forecasts either.

But that’s what they did, lowering 2016 GDP forecasts from 1.9% to 2.0% to 1.7% to 1.9%.

It also increased the unemployment projections to 4.7% to 4.9% this year instead of 4.6% to 4.8%.

It also kept its expectations for core personal consumption expenditures (PCE) at 1.6% to 1.8%.  However, that’s still below the Fed’s healthy target of 2%.

Without stronger numbers, there’s no real chance of a rate hike this year…

But even those projections are too rosy…

For quite some time, the Fed has hoped that excessive “accommodative” monetary policy would be enough to spark a stronger economy and push inflationary numbers closer to its healthy range of 2%.

Unfortunately, such accommodating actions haven’t helped.

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In fact, over the last year alone, the U.S. economy has only grown 1%.  Business investments and productivity remain weak.  Consumer spending is slowing.  Inflation is running below target.

While unemployment has remained near 4.9% in recent months, many of the jobs added were temporary positions.  In August 2016, of the 155,000 jobs added (which missed estimates for 181,000), bars and restaurants added 34,000 jobs. 

Leisure and hospitality added 29,000 jobs.  Retailers added 15,100 jobs.  Meanwhile, the manufacturing sector cut 14,000 jobs. 

Wage growth only grew at 0.1% also missing expectations in the August report.

If unemployment were healthy, inflation would not be stuck at 1.6%.

We would also see evidence of rising retail sales from confident consumers.  Instead, such sales fell 0.3% in August 2016 to $456.32 billion. 

Also, the Institute for Supply Management’s index for manufacturing activity slumped to 49.4 in August from 52.6 in July. Over the last 12 months, the index has averaged 50.2, which barely falls into expansion territory. 

On top of all of that, there was further decline in second quarter productivity to -0.6%, marking the biggest decline in the number since 1979. 

The Federal Reserve may speak about raising rates again, as we near December 2016.  But it likely won’t happen. 

Don’t hold your breath for an increase.  We’re just not ready…

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