Fed Finds "The End Of The Road"
By Tyler Durden
Submitted by Lance Roberts via RealInvestmentAdvice.com,
Fed Finds “The End Of The Road”
The FOMC press conference yesterday made one thing abundantly clear; the Fed has lost control of the narrative and their credibility.
The problem stems from the Fed’s ongoing adherence to “data dependency.” Last December, when the Fed Funds rate was increased, the Fed discussed the potential for further rate hikes in 2016 as inflation and employment data strengthened.
However, in March, with employment and inflationary data improving combined with a strong rebound in the financial markets, the Fed opted to ignore their data and focus on “global risks” to hold rates steady.
The problem for Ms. Yellen is while she was waiting to find the “perfect balance” of domestic growth and global stability, global economic weakness has now begun to destabilize domestic growth and employment. As the Fed’s own Labor Market Conditions Index shows, the rise in interest rates in December marked the peak in employment growth. Not unlike initial rate hikes have done every time previously.
Despite the perennial hopes of stronger economic growth, a resumption of employment trends and stronger inflation, the FOMC’s own projections clearly showed why they did not increase rates.
Besides being absolutely the worst economic forecasters on the planet, the Fed’s real problem is contained within the table and chart above. Despite the rhetoric of stronger employment and economic growth – plunging imports and exports, falling corporate profits, collapsing manufacturing and falling wages all suggest the economy is in no shape to withstand tighter monetary policy at this juncture.
Of course, if the Fed openly suggested a “recession” could well be in the cards, the markets would sell off sharply, consumer confidence would drop and a recession would be pulled forward to the present. This is why “what the Fed says” is much less important than what they do.
The big risk for the Fed has always been the market would “call their bluff” be unwilling to buy into the “forward guidance.” It is currently too soon to know for certain but reactions following yesterday’s announcement are not promising.
With the ECB and the Fed policy meetings behind us, for the moment, all eyes will turn back to economics and earnings.Unfortunately, neither one of those is particularly supportive at this juncture.
LMCI Pointing To Rise In Claims
One of the more regularly pointed to indicators the economy is “nowhere near a recession” is jobless claims which have been in a steady downtrend over the last few years.
Today’s release of the jobless claims saw an increase in claims to 277,000 in the most recent report up from 264,000 last month. Historically, when claims are below 300,000, the labor market should be running at or near capacity. The problem, this time, is while claims have fallen due to cost cutting, unemployment and underemployment remain problematic along with the suppression of wage growth.
This issue of “labor hoarding” explains the sharp drop in initial weekly …read more
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