Pay Attention, Ignore the Fed
After almost seven years, the beginning of the end of ultralow rates is here.
What's that you say? The Fed is going to raise rates?
Remember the so-called taper tantrum in 2013, when some traders dumped Treasuries to express their ire at the Federal Reserve for having the temerity to suggest that rates can't stay at zero forever? Today it's hard to imagine anyone left who doesn't understand a rate increase is coming, most likely sooner (2015) rather than later (2016). Still, there's a whole generation of traders who have never seen a rate increase, the last of which was a 25-basis-point bump in the fed funds rate way back on June 29, 2006.
Regardless, normalization of interest rates can't get here soon enough for me, if for no other reason than to end this incessant game of "Will they or won't they?" Higher borrowing costs are a small price to pay to shut up the ninnies who feel compelled to engage in the semantic game of parsing each and every word of every speech, Q&A session, and most especially the latest Federal Open Market Committee statement.
Instead of hanging on every Fed utterance, let me suggest you take a different approach. Take one phrase from the Fed as your mantra: data-dependent. The rest of the Kremlinology over the incessant communications from, by or about the Fed should be ignored with prejudice. Instead, step back and take the 30,000-foot view to understand what is happening today, and what is most likely to occur in the future. That does a far better job communicating what is likely to happen than anything Fed Chair Janet Yellen will say in a news conference.
The big picture is simply this: The Fed has a dual mandate to keep inflation under control -- check! -- and to increase U.S. employment -- check! When the Fed says any interest-rate decision is data-dependent, this is what it's talking about. If you want to put some flesh on those bones, let's consider a few bullet points about the present environment:
- Employment: The U.S. labor market is the healthiest it has been in many years. During the past year, almost 250,000 new jobs were created each month. During the past four years, the average has been almost 210,000. Unemployment has come down dramatically from its peak of 10 percent in 2009 to 5.3 percent.
When the Great Recession officially ended in June 2009, there were 130.9 million people employed in the U.S. As of the latest employment report, 141.8 million people had jobs. The July nonfarm payroll data, due next week, should show that the economy has added more than 11 million jobs since the recession ended. That is a reasonably robust employment picture.
- Inflation: It's modest, running at less than the Fed's 2 percent target. The dollar is the strongest against a basket of major currencies in almost 12 years, and gold is down almost $800 an ounce from its 2011 peak. Forget hyperinflation; even those who have been forecasting modest inflation have been wrong.
- Stock: Major indexes are either at or within 5 percent of record highs. I believe the Fed overemphasizes this measure, and misunderstands the wealth effect's impact on the economy. Still, balance sheets of U.S. corporations are the healthiest they have been in decades, as are profits. Stocks have been a reliable forward indicator of growth and demand for capital, and as such, are also supportive of more normalized rates.
- Economy: During the past five years, the U.S. economy has grown -- more slowly than is ideal, but faster than most have expected.
- Financial system: It has been stabilized thanks to new rules that reduce or eliminate some of the most risky behavior.
I don't want to paint too rosy a picture. There are certainly plenty of negatives:
• Gross domestic product: Growth has been erratic, with weakness in winter months far greater than what can reasonably be blamed on weather.
• Prices: Those for key industrial commodities, including copper, oil and iron, have tumbled. Oil might be under pressure due to huge increases in supplies, but the same can't be said of the industrial metals, which suggests declining demand.
• Home ownership: This is at the lowest level in almost a half century; millennials continue to live in their parents' basements in disproportionate numbers.
• China's economy: Growth is slowing and its stock market bubble is popping. The world's most-populous country might be in trouble.
• Europe: The euro zone is an endless debacle; even as there are signs that the Greek debt crisis may be resolved in some manner, nobody (myself included) truly believes this isn't going to erupt again in a year or two.
But the bottom line remains this: On balance, the data remain far stronger than anyone in the midst of the financial crisis would have imagined at this point. And many key economic indicators are stronger than the Fed had earlier suggested would be the threshold for ending its zero-interest-rate policy.
You can parse each utterance of every Fed governor, or you can look at the data. I prefer the latter -- and it tells me interest-rate normalization will start before Christmas.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
To contact the author on this story:
Barry L Ritholtz at firstname.lastname@example.org
To contact the editor on this story:
James Greiff at email@example.com