Look for Steadiness from the Fed The Federal Reserve is set to make its first policy statement of the year on Wednesday, so this is as good a time as any to reiterate our view that the Fed is likely to keep short-term interest rates steady through 2020 and, while pressures will build, the Fed
Tag Archives: Federal Reserve
The Big Picture and the Fed. If you take a long hike up a mountain, there’s plenty to appreciate along the way. But, sometimes, you just have to stop and enjoy the view. With that in mind, let’s forget about the April employment report – which saw a combination of very fast payroll growth and moderate wage growth – and think about where the labor market stands in general.
Don’t obsess about the Federal Reserve. Instead of obsessing about monetary policy, investors should spend their time this year focused on the resilience of the economy. For example, in spite of the partial government shutdown, initial claims for jobless benefits hit 199,000 in the week ending January 19, the lowest since 1969. And auto analysts are forecasting solid sales of cars and light trucks for the month. In other words, the data shows no justification for doom and gloom.
Why Not 50? Raising rates by 50 bps this early in the cycle isn’t going to make monetary policy tight. Right now, nominal GDP (real GDP growth plus inflation) is up 4.8% in the past year and up at a 4.4% annual rate in the past two years, well above the current federal funds target of 1.625%. The 10-year Treasury yield is about 145 bps above the funds rate. Meanwhile, the banking system is chock full of excess reserves and a record amount of capital. Congress and executive agencies are moving to undo some of the excess regulations on the banking system, there are no major bubbles in the financial system, and corporate balance sheets are in fantastic shape.
Don’t Fear Higher Interest Rates…why higher rates don’t mean the end of the bull market in stocks look no further than 2013. Economic growth accelerated that year, with real GDP growing 2.7% versus 1.3% the year before. Meanwhile, the yield on the 10-year Treasury Note jumped to 3.04% from 1.78%. And during that year the S&P 500 jumped 29.6%, the best calendar year performance since 1997.