My family and I move every 20 years or so whether we need to or not, so on Wednesday when the Fed was making its decision to keep interest rates right where they are, I was busy unpacking all the boxes that we’d packed on Tuesday. (I’m sooo looking forward to the day when you can digitize everything you own, upload it all, and then download to your new location. I’d definitely pay $1.99 for an app that did that.)
Anyway, with the benefit of hindsight–and moving- induced exhaustion–I have to say that the nothing that Fed did on Wednesday was actually extremely important as an indicator on a potential September interest rate increase.
While it did nothing on Wednesday to change interest rates, the U.S. central bank said quite a lot about the U.S. economy. The economy, the Fed said, had overcome uncertainties to achieve what looks like a sustainable moderate rate of growth. Job growth has pushed the economy to something close to full employment. And, the Fed added, it sees fewer clouds on the horizon for the U.S. economy.
This isn’t a formula that guarantees an interest rate increase when the Fed next meets on September 21, but this language does clear the way for a possible interest rate increase.
The problem facing the Fed, though, remains the same: After all the stimulus that the Fed has provided for the U.S. economy, where’s the growth?
Inflation is well below the Fed’s target of 2%. The economy shows no signs of breaking out of its low growth rut. Maybe Friday’s first read on second quarter GDP growth will come in at the 2.6% rate that economists were expecting last week, but current forecasts are looking for growth closer to 1.8%, and that would still leave the U.S. economy looking back at growth of less than 2% for the first and second quarters of 2016 and the last quarter of 2015.
Maybe, the Fed has to be wondering now, the speed limit on the U.S. economy has been lowered to 2% instead of 3%. Maybe current growth is about as good as this economy–domestic and global–can deliver. And if that’s the case, what’s the point, exactly, of raising interest rates? To make sure that growth stays well below 3%? To head off nonexistent inflation?
In these circumstances and with this data, the Fed is being asked to figure out not just what is happening but why. Are we in for a long period of slow economic growth because something has changed in the US. and global economy?
The Fed would like to know.
I’m sure investors would like to figure out an answer too–since the answer has major implications for portfolio design and risk taking.
At the moment the Fed funds futures market hasn’t raised the odds for a September move beyond the 18% or so of the days before the Fed meeting.