FOMC: Much Ado About Nothing

Life’s but a walking shadow, a poor player
That struts and frets his hour upon the stage
And then is heard no more: it is a tale
Told by an idiot, full of sound and fury,
Signifying nothing.
–Macbeth

Sept. 17 is finally here, and one can’t help but be reminded of Shakespeare’s play, “The Tragedy of Macbeth.” The general Macbeth receives a prophecy from a trio of witches, leading to tragedy and civil war. The quote above, perhaps Shakespeare’s most existential, suggests life is meaningless. It is hardly an exaggerated metaphor for the useless posturing by the punditocracy across the land in the days, weeks, months even years leading up to today’s Federal Reserve announcement on interest rates — or not.

Whether the Fed moves the rate from its 0-0.25 percent band to a pure 0.25 percent rate, is inconsequential. My perspective is simply that a zero interest rate is an emergency footing, and if we are no longer in a state of emergency, then we should no longer be on an emergency footing.

But that is logic, devoid of passion and portfolio positioning. Most of what we hear these days comes from those who are arguing their book or that of their clients. I can’t say I have seen a whole lot of objective analysis on this subject.

Perhaps the closest thing to objectivity comes from Nick Colas of Convergex.

He notes that:

Stocks are set up for a rate hike today. Over the last five days, every sector of the S&P 500 is up at least 1%.  Financials, in theory the most rate-sensitive sector, are also the best performing group (+4.0%).  The index as a whole is up 2.8%. And the yield on the two year Treasury note sits at 81 basis points. The last number is the most telling, since that’s the highest yield since early 2011 and this part of the yield curve tends to be the most attuned to short term rate moves.

Hence, the mechanism that — at least theoretically — digests all known information, reflecting that knowledge back in prices, suggests a rate hike is coming. But how much does it really matter whether the Fed moves today or sometime in December?

Corporate America is flush with cash; balance sheets are in a better position for rising rates than at any time in recent memory. The consumer has spent the past six years deleveraging; the federal government’s annual deficit is the smallest it has been in years. (I believe we should refinance the entire U.S. debt at these ultralow rates, but that’s just me.)

I can’t fathom why so many people seem to believe that if rates tick up to 25 basis points, civilization will all but end. Ironically, many of the same doomsayers who were warning of the perils of zero interest rates the past five years now are claiming the economy is too weak to withstand a 0.25 percent rate. I won’t mention their names — that’s what they want — but it is all of the usual suspects.

My expectation for what would be reasonable for the Fed to do is raise rates 25 basis points today or in December; it can then follow that with another 25 basis points a quarter, so long as the metrics imply the economy can absorb that. If the economy slows, the Fed slows the pace of increases, stops or even reverses. If the economy accelerates too much, particularly wages and/or inflation, it accelerates rate increases. It’s really not that complicated.

Some have pointed out how anomalous it is for the Fed to raise rates while the Europe Central Bank and the Bank of Japan are still in an easing mode. Keep in mind that for several years, it was the Fed that was at zero, while the rest of the world’s central bankers were not as accommodating. Thus, it makes perfect sense that the Fed should be the first to begin normalizing rates.

But really, let’s get on with it. Quite frankly, the incessant Kremlinology has become tedious. To paraphrase Shakespeare, the pundit’s obsession with the Fed rate increase reveals that, like the poor players in life’s play, they too are idiots.

Originally published as:  A Fed Rate Hike? Nudge Me When It’s Over.