The Fed’s Dot-Plot  looks like something akin to a Rorschach test. It has been updated and it’s clear that the Fed is less hawkish now than it was when the latest Federal Open Market Committee (FOMC) meeting was held.  Certainly, this isn’t the same Fed that worked overtime to get Wall Street ready for a summer rate hike.  There’s still a chance for one or two hikes this year (the dots point to Fed funds at 0.9 at the year’s end).  

During the question-and-answer segment, Janet Yellen took great pains to say that every meeting is “live,” meaning that despite their guidance, shocks in the data could lead the movement sooner.

Déjà Vu

For most, these FOMC gatherings seem like the same thing over and over again where the language, urgency, and messages never change.  However, there are subtle changes that should be noted, including those in the statement.

These words are similar, but each change conveys a message.

The pace of the economy slowed from improving; it’s the biggest change of them all as the Fed is pushing hard for a reason to hike. It needs to do it against the backdrop of a growing (read improving) economy.  Household spending has strengthened, but that shouldn’t be confused with being strong.  Housing continues to be a bright spot, but hopes for inflation took a big hit from being low to declining. 

Word Games FOMC Statement	April	March
Pace	Slowed	Improved
Household Spending	Strengthened	Moderated
Housing Sector	Improved	Improved
Inflation Compensation	Declined	Remain Low

The assessment of the economy is of no great shakes, but it’s the Fed’s expectations that might be the reason why stocks actually sold off into the close. It’s clear that the Fed has the unenviable job of taking victory laps on the economy when there isn’t much to cheer and yet, it justifies its very existence.

Federal Reserve	2016	2017	2018
Fed Funds	0.9	1.6	2.4
March 2016	0.9	1.9	3.3
GDP	2.0	2.1	2.0
March 2016	2.2	2.1	2.0
Unemployment	4.7	4.6	4.6
March 2016	4.7	4.6	4.8
Core Inflation	1.7	1.9	2.0
March 2016	1.6	1.8	2.0

Economic Woes

The Fed acts as though a weak jobs report is an anomaly because so many other signals look great.  It’s simply not true.  At best, this is a bifurcated with strong areas in the new economy, but the rest is either bumping along or still underwater.

Capacity utilization has been mired in a multi-decade decline, but it enjoyed a strong rebound from Great Recession lows, only to stall in December 2014 and more recently lurch into a freefall.  The bottom line is while these ultra-low rates are dangerous and should be higher; waiting for the perfect economic backdrop is folly.

Market

Equities have been under pressure all morning and the needle hasn’t budged with the release of several economic reports including the Philly Fed.  The regional report on manufacturing came in much better than anticipated, but the devil is in the details.

• Headline 4.7
• Estimate 1.0
• Previous -1.8

Here’s the problem.  In a supplemental questionnaire when asked about third quarter business trends:

• 44.9% accelerating
• 26.1% decelerating

The deal with improving demand businesses has three choices:

Hire more workers	22.6%
Increase hours current workers	29.0%
Increase productivity	41.9%

The sobering reality is that even as conditions gradually improve the correlation to jobs will be tenuous at best.

 

Comments

Several years ago a friend was saying that QE was bad and that low interest rates were hurting those on fixed income. With 20/20 hindsight it appears that the Fed policies of printing money and keeping interest rates low has been wrong as the recovery has sputtered. They should have gradually raised rates to get back to normal while giving the savers more money to spend and not encouraging borrowing to buy stocks. Rodman Johnson on 6/16/2016 12:02:58 PM

Coverage of the Fed is way overdone, just like the Brexit and on and on. They have little idea of what they are doing. E.V. Wagoner on 6/16/2016 2:06:14 PM

Agree no idea, but large impact. David Begley on 6/17/2016 12:53:09 PM

Take this to the bank Charles. Not 1 more increase this year. So get off of it because, it is beginning to sound like manipulation on your part....But Nay you wouldn't attempt that. Would you ? ww on 6/19/2016 12:54:00 PM

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