Headlines in today’s US print edition of the Wall Street Journal are now confirming what a few of us have felt all along: the next move by the US Federal Reserve in moving short term interest rates up, the first such move since 2006, will likely be in 2016, not 2015. I made that call in August (see “Timing is not in the feds favor for a rate rise in September”) – but it is taking time for others to grasp the complexity and dire situation of the global economy.
The news today in the newspaper is grim:
- Fed Doubts Grow on 2015 Rate Hike – consumer spending not growing; more signs of lower input costs pushing prices lower, and disappointing jobs data
- Wal-Mart Surprises with Dim Outlook – largest retailer on the planet in the largest homogenous market on the plant suggest profits will drop as much as 12% next year and sales for the year ending January 31st will be flat.
- The Fed’s Catch-22: Rates and Recession Risk
- $1.17 Trillion at Zero Percent Interest – ‘Investors are growing increasingly skeptical that the Federal Reserve will be able to raise short term interest rates this year with inflation subdued and growth not robust.”
So the smart money suggests 2016 and at this rate, taking China, commodity prices and other factors into account, middle of 2016 at best. Only if really strong US wage growth persisted for two periods would the probabilities change significantly. You have to remember that almost all the dials are glowing “yellow” and turning a darker color towards “red”. Here is my range of expectations based on current economic conditions:
- Late 2016: 25%
- Middle 2016: 40% chance
- Early 2016: 25%
- By end 2015: 10%
And I also have three bugbears at present. I hate it when papers report on the how QE has ended. It has not “ended” – it remains firmly in place. What has happened is that the Fed has stopped issuing any more. The billions of dollars the Fed pumped into the economy remains “out there” – if only we knew where all that money it went. That money has to be brought back; the debt has to be repurchased. A period of “quantitative tightening” is required in order to get the system back to normality. A point or two here or there in terms of interest rate hike does not a normal economy make.
Second – Joe Biden should get off the pot. We all know he will stand – even though his chances dropped after this week’s Democratic Presidential Debate. Just stand already so we can be entertained and get it over with.
Finally – That fan-favorite of the Tea Party with big budget reform ideas, Paul Ryan, will shortly announce his plan to run for House Speaker, replacing John Boehner. This was just the opportunity he was waiting for – albeit it coming out of the blue. Of course he said he would not stand; and of course his supporters pleaded with him. So please, let’s get that one out the way too.