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.

 

 

 

 

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What's been said:

Discussions found on the web:
  1. catman commented on Sep 17

    Shoot me now, the suspense is killing me.

  2. wally commented on Sep 17

    The true stimulus for most Americans since ’09 has been the Federal deficit. That has decreased by 2/3 since ’09.
    That’s a more significant factor than a quarter-point Fed Fund change.

    • rd commented on Sep 17

      As far as I can tell, Bernanke was about the only person who was able to figure out a rational path forward in 2008-10 and even he seemed to be winging it much of the time. So all the talking heads blathering about the 0.25% hike are most likely completely missing the boat as virtually none of them were right in 2007, 2008, 2009, 2010…..

      Raise it 0.25%, declare victory, and move onto important things.

    • gordo365 commented on Sep 17

      Low gas prices have also been stimulus

  3. VennData commented on Sep 17

    1) Moving means the Fed declares victory. A HUGE psychological kick in the “QE-infinity” Bear’s heads

    2) Passbook rates will nudge to 1% at regional banks giving cash laden oldsters more money.

    3) “The trajectory” will quickly “the hike” and take on even more speculative and broader media coverage.

    Moving or not is important.

  4. CD4P commented on Sep 17

    I caught me some Maria Bartiromo on Fox Business Network this morn and she had on Rand Paul’s economic adviser who made $1 billion off the recent 1,000 point dip day. She couldn’t get him to divulge much but he stated the recent volatility (ie the 1,00 point dip) is just the start.

    • VennData commented on Sep 17

      Another future predictor! Maria you do investors such great service.

      Remember when she bitched about leftists wanting to put restrictions on banker pay into Bush’s TARP because maria said “they [bankers] could just go to Europe!”

      “GO! LEAVE! BANKERS GO RUIN EUROPE” – VennData

    • Iamthe50percent commented on Sep 17

      I second that motion! And I believe tens of millions of Americans are with us.

  5. Publius commented on Sep 17

    “We defy augury. There’s a special providence in the fall of a sparrow. If it be now, ’tis not to come. If it be not to come, it will be now. If it be not now, yet it will come—the readiness is all.”

    If the markets have been reading their Shakespeare, they will be ready.

  6. DeDude commented on Sep 17

    In the context of actual lending cost and interest income the 25bp is completely inconsequential. The effects are all psychological – bit still very real. Stock markets have already responded to the fact that rates will go up in the near future. That has little influence on the real economy in itself, but is of interest to those who have a lot of money in stocks. If they only add another 25bp in all of 2016, then the real economy will be perfectly happy, if they begin adding 25bp at every meeting from now on then they will tank the recovery. Do not forget that this is ultimately a political organization as Greenspan proved when he tried to tank the economic recovery half way into Clinton’s first term. There will be right wing sock puppets who push for a rate hike simply to help “Club for Growth” get their handpicked GOPster into the white house.

  7. john farmer commented on Sep 17

    The “emergency” actions taken by the Fed were QE1, QE2, QE3. Zero interest rates were the limit of using normal policy (and finding it wasn’t enough in years past). The economy is not in the emergency it was and that’s why QE is done.

    Now the question is what should the Fed rate be. Today it’s at zero, and here’s what we see re the Fed’s dual mandate:

    a. Inflation is a problem — it is too low!
    b. Unemployment rate is 5.1%, about half its recent peak, but employment participation is at its lowest level in a generation. No wage growth, and little sign we are anywhere near “full” employment.

    I find the argument that money needs to tighten now very unpersuasive.

    Will a 0.25% increase have a big impact on the economy? Probably not. But what is the downside of having the Fed continue at zero until it sees too much inflation or wage growth, or some other problem develop?

    (All the attention on the Fed is actually beside the point. Fiscal stimulus is a much better option generating growth right now, but that’s just not going to happen.)

    • rd commented on Sep 17

      This Congress’s version of fiscal stimulus is deciding not to shut the government down.

  8. constantnormal commented on Sep 17

    hmm … Macbeth … that’s the one where everyone dies, right?

    It woulda been less ominous if you had used a quote from A Midsummer Night’s Dream … e.g., “Lord, what fools these mortals be!” (Puck)

    Or even something a bit more contemporary, e.g., “I pity the fool!” (Mr T, The A Team)

    But somehow, I think any relevant quote is somehow going to need some fools in it.

    All we can do now is await the next recession, and ride the next drop o’er the falls. It will not matter whether one is in bonds (negative rates fer sure, what else has the Fed got left to use?), or stocks (what does a single-digit PE on the S&P 500 work out to be?). Janet Yellen, in her desire to lighten the load, has thrown the steering wheel and brake pedals over the side.

    So it goes.

    • Ralph commented on Sep 17

      Thanks for the forecast, Kurt Vonnegut!

  9. tamarbucks commented on Sep 17

    Who gets credit for the word “punditocracy”? That is fantastic – and a lovely fit as Shakespeare was known for making up words. It brings to mind the likes of the puffed-up Constable Dogberry from Much Ado About Nothing… “too cunning to be understood”.

    Don Pedro of Aragon: Officers, what offense have these men done?

    Dogberry: Marry, sir, they have committed false report; moreover, they have spoken untruths; secondarily, they are slanders; sixth and lastly; they have belied a lady; thirdly, they have verified unjust things; and, to conclude, they are lying knaves.

    Don Pedro of Aragon: What is your offense, masters? This learned constable is too cunning to be understood.

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