Over the past several weeks, I have laid out details for why I feel interest rates will continue to trend lower. In a nutshell, I believe that it is unlikely that the Federal Reserve will raise rates in 2015 and it may be mid-2016 until they do… if not longer.
The Federal Reserve announcement on Wednesday was true to form – there was just enough information given that regardless of whether you thought they would raise or lower rates, you probably came away with ammunition supporting your opinion.
In fact, 11 of 17 of Wall Street’s ‘top’ analysts predict that the Federal Reserve will raise rates in September of this year. And only one of them thinks that the Federal Reserve will wait until next year. Through my studies, I have found that Wall Street economists tend to remain positive and to promote investing.
Federal Reserve Chairwoman Janet Yellen is masterful at providing assurance that the economy is growing and detailing why they expect it to reach their targets. In other words, she continues to talk up the economy because if she doesn’t (and the market loses confidence) we could be plunged right back into another recession. So every Federal Reserve Governor is going to sound a positive note about the economy in any speech they give.
So we can’t really base our opinion on their comments regarding the economy. Instead, we should focus on the numbers they report—especially since they also remind us in every sentence that they will be data dependent. The three key areas are inflation, GDP and unemployment.
Regarding Inflation
For instance, Chairwoman Janet Yellen says “The Committee reaffirmed its view that the current 0 to ¼ percent target range for the federal funds rate remains appropriate. As we said in our statement, the decision to raise the target range will depend on our assessment of realized and expected progress toward our objectives of maximum employment and 2 percent inflation.”
Then, later she says “the inflation projection for this year is below 1 percent, unchanged since March.” In other words, they hope that inflation will eventually move “toward” the 2% level “over the medium term” but right now is it only hovering around 1%.
So currently, inflation is at 50% of where they say they want it to be before they raise rates.
Regarding Economic Growth
What did she say about economic growth? Here’s a snippet: “The central tendency of the growth projections for 2015 is now 1.8 to 2.0 percent, down a little more than one-half percentage point from the March projections.”
So they reduced their growth forecast by almost 25% in the last quarter. I’ve seen research that shows the third and fourth quarter may be worse than the second quarter.
Regarding Unemployment
Lastly, it appeared that she confirmed that the unemployment numbers deteriorated slightly when she said “the unemployment rate projections for this year are a little higher than in March.”
My Conclusion
The Federal Reserve has to continue to be a cheerleader for the U.S. economy and to highlight the positive aspects. And our economy IS continuing to grow, but it is growing as a slower rate. It is decelerating instead of accelerating. That’s likely why she said this:
“My colleagues and I would like to see more decisive evidence that a moderate pace of economic growth will be sustained,” Yellen said.
As I’ve mentioned in previous commentaries, I believe the problems in our economy cannot be solved by monetary policy alone and that it will require legislative solutions. Until then, I believe the Federal Reserve will keep interest rates lower for longer. That type of environment is positive for both stocks (i.e. the S&P 500) and bonds. That’s why I added to equities yesterday and expect to do more if the markets pull back. It is likely that bond yields will continue to remain volatile because of European concerns. I will continue to watch the situation closely and adjust as needed.
Twitter: @JeffVoudrie
Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
