Overall, the Federal Open Market Committee (FOMC) Meeting this month resulted in:
A continued delay in raising interest rates.
Another positive stock market reaction.
Investors and US firms getting to ‘rest easy’ a little longer.
There were no surprises coming from the FOMC announcement following its June 15th meeting. Validating what our leading indicators have long been showing, the US economy continues to struggle with weaker-than-normal economic activity reported. As a result, the FED, following this report, will once again delay any interest rate increases.
In 2015, the FED did something similar – only raising rates once during the calendar year due to market conditions showing a decline in momentum towards the latter half of the year. At that time, the economy’s slow growth and leading indicators caused the FED to delay additional rate increases; so it isn’t surprising that the FED continues to hold interest rates at 0.25% – 0.5% as the U.S. economy continues to underwhelm through the first half of 2016.
Close followers of the FED are becoming immune to the organization’s frequent ‘hawkish talk,’ instead expecting it to delay rate hikes upon any signs that the US economy isn’t meeting expectations. For example:
• In the June 2014 FOMC meeting, half of the FOMC expected rates to be above 1% by the end of 2015.
• In the June 2015 meeting, more than half the FOMC expected rates to be above 1.5% by the end of 2016.
It is unlikely the FED will raise rates next month, as Industrial Production continues showing weakness (May is down 1.4% from last year), not to mention how inflationary pressures are still moderate. By keeping interest rates low, it will remain hard to pinpoint exactly how much the economy now relies on low interest rates to finance hiring, stock buy-backs, and other economic activity.
Some early positive signals from our Retail Leading Indicator suggest that later this year the economy could see a rebound, thus increasing the likelihood of a rate increase before 2017. But as I wrote in my previous post, all eyes will be on the consumer, as the weight of the economy rests on its’ shoulders. This year, US consumer behavior will be impacted by factors such as recovering gas prices and real average hourly earnings that are starting to decelerate. While our Retail Leading Indicator is getting a boost from improvements in consumer confidence and a strong housing market, the growth trend is still early and fragile.
Meanwhile, the FED can do nothing to help other than leaving interest rates where they are. Any sort of economic shock at this point could put the cost-sensitive consumer over the edge and make 2016 a year of far-below-normal economic activity.
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