It is a fait accompli that today’s Fed meeting will raise
rates a quarter point. The more important question is “How many more increases
are we likely to see in the New Year?” In order to determine that, we need to
know a few things: Why the Fed is raising rates, what their goal is, and what
data they are watching.
If we take the Fed’s own comments at face value, we can
eliminate “popping a Real Estate bubble” as the goal. Fed Chair Greenspan has
that it is all but impossible to identify a bubble in real time, and besides,
it is easier to clean one up afterwards than to prevent one. While each of
these premises may be (arguably) false, that is what the Fed is on record as
saying. Therefore, believing their words, we must accept that targeting the
frothy Real Estate Market is not the Fed’s primary goal.
Eliminating the bubble rationale leaves 2 key issues: Price
Stability, and Wages & Employment. As its been long apparent to everyone ‘cept most Wall Street economists,
Inflation has been robust, due to commodity demand. That’s reflected in the
actual price data of nearly everything (except income). Fools be warned: we
reiterate our belief that the “Core Rate” is the greatest sucker play in all of
That leaves Wage Pressure and Employment as the other key
issue. And as noted, Wage pressure is nonexistent. Real income has been negative
for most of the year. That’s not the reason the Fed is tightening monetary
Nor is job creation a basis for reducing accommodation.
Despite rumors to the contrary, this has been an extremely poor job creation
cycle, post-recession. There’s much less to the 4.4 million new jobs touted by
Treasury Sec’y Snow than meets the eye. That’s a peak to trough number;
measured from either the end of the recession or the start of the President’s
1st term, we get a 1.8 million number. Even the 4.4m number contains about 37%
projected birth/death adjustments – an unusually high amount of the total. And
we have seen an unusually large number of jobs created by Uncle Sam, rather
than the private sector. Beyond the mere numbers, we see the quality of jobs
created is much worse than the jobs previously lost, paying lower wages and
While the Employment data is generally discouraging, the
good news is the abysmal job growth leaves the Fed with options. There is
utterly nothing in the income or employment data forcing the Fed to keep
tightening. It remains a story of inflation, and nothing else.
We have never felt it is the responsibility of Wall Street
Economists or Strategists to “advise” the Fed as to what to do; instead, we
feel it is more advantageous to analyze their actions and what they may be
basing them upon.