Will they? Won’t they? The financial press (and it seems the political press too) can’t stop with this. Yep, because it’s election season, everyone is playing the guessing game on a possible Fed rate hike at their September meeting.The back and forth (based on hints from Fed voting members) has equities all over the place the past few days.
So will they? Let’s keep this simple. NO.
Fed Fund futures are now pricing only a 20% probability of a hike in Sept. The futures are pricing in a 29% chance at their Nov meeting (days before the presidential election), and a 54% chance of a raise in December. Unless economic data falls off of a cliff, December looks like the right call.
So why have I been so emphatic about this? As you know I have no special knowledge of the Fed’s machinations? It’s just common sense.
Let’s first look at the math. Goldman Sachs research found that (since 1994) 90 percent of (the 31) rate hikes were priced by Fed Futures at 50% or higher 30 days ahead of the FOMC meeting. What that means is the Fed doesn’t like to surprise investors. If they’re going to hike they telegraph it ahead of time.
Of course, one of the main tools in the Fed’s toolbox is surprising markets. But that is almost exclusively reserved for rate cuts in the midst of market/economic panics. Think back to Greenspan’s surprise rate cuts in early 2001, or Bernanke’s discount rate cut at the onset of the financial crisis in Aug 2007 and then the aggressive move to zero for Fed Funds in 2008. That surprise is often just the jolt the markets need and show determination to spur investment in risk assets, or lending. Surprise rate hikes have the opposite effect.
And to surprise with a hike, in the midst of an already fragile economy would be asinine. Throw the potential political implications in and there’s just no way. It’s not in the Fed or Yellen’s DNA. I know, I know the Fed is supposed to be an apolitical organization. But they know an election is coming up and the last thing they want is to be seen historically as having affected it with a rate hike. And don’t think Donald’s Trump’s recent rhetoric that Fed Chair Yellen should be “ashamed” of what she is doing to the country (keeping rates low and steady) will cause her (and the FOMC) to go the other way. No one will ever remember that they didn’t raise rates into an election. Trump is simply playing a no lose hand with those statements. His populist message about the damage the Fed is doing plays with his base, and maybe even reaching some Republicans and libertarians that are not his current supporters. But it will not bully the Fed into tightening.
Oh, and one more thing. Last December, the Fed raised the Fed Funds rate for the first time since June 2006 from a zero percent bound. At the time the yield on the ten year treasury was 2.2%-ish. It is now 1.7%-ish (up from 1.3%-ish!). At that time Fed Fund futures were pricing 2 to 3 more hikes by now, which obviously has not happened:
The Fed has had plenty of opportunities to tighten in 2016. But when financial conditions cooled, they missed their window. When the Fed finally raises in Dec for only the second time in ten years, it will not be a big deal as long as U.S. stocks are not at new all time highs. But if they are, and the financial conditions are still shaky, any sign of continuing hikes could take away the Fed put that’s enabled “buy the dip” to be so effective for the past few years. And if Donald Trump is President? I can guarantee you that he will NOT be in favor of rate hikes in those conditions. A lame duck Fed chair hiking into that sort of political black hole would be an absolute nightmare for the economy and the nation.
And why does all this matter with Fed policy and this election? I’ll remind you about a post from June, MorningWord 6/24/16: “This is not a moment, it’s the movement”. Things like Brexit and Trump’s candidacy are in many ways related to central bank policies:
It’s been my view for some time that overly accomodative monetary policy the world over, some 8 years after the start of the subprime debt crisis, is evidence that the world is in the midst of a rolling credit crisis that started here, never concluded in Europe in 2011/12 and is in the process of enveloping Asia and emerging markets. The crisis monetary policy used to avoid a depression in the U.S. has become the playbook for global central banks to keep their economies afloat. There is little evidence of organic growth anywhere in the world, and at this stage of the game its just downright scary. The Brexit vote, and the rise of presidential candidates like Donald Trump here in the U.S. demonstrate an anger that in some ways is a result of some of the unintended consequences of these central bank policies.
It’s also been my view that a Trump presidency would be a massive destabilizing force. The “apolitical” Fed does not want to be on the hook for that. Remember, they also went the best colleges, have great brains and know all the best words. And while their monetary policy at this stage of the recovery are viewed as deplorable to some (on both sides of the aisle), the idea of reversing course now and visibly affecting who sits in the oval office in January would be too much for them.
So again, December it is, NOT Sept or Nov.
Oh, and for those who think there is an imminent threat of higher rates because of what some like Doug Kass are calling a “generational low” in rates? They’re probably looking at these two charts of the 10 year U.S. Treasury Yield, the first showing break of 1 year downtrend (Doug’s thesis has far more to do with charts though):
And this, that generational double bottom:
But I will remind those that do see a generational bottom that the trend that is not likely to be broken in a major way in the sort term. Given the fragility of the global economy and the uncertainty of the nation politically: