The Federal Reserve did what investors expected today. Specifically, policymakers kept short-term interest rates unchanged, and they lopped another $10 billion off the QE program. We’ve now seen QE shrink 59 percent to a monthly pace of $35 billion from $85 billion before the initial taper, on its way to zero by this fall.
At the same time, Fed officials also sounded much more optimistic about economic growth in their post-meeting statement. The text noted that “labor market indicators generally showed further improvement” … that “growth in economic activity has rebounded in recent months” … and that “household spending appears to be rising moderately and business fixed investment resumed its advance.”
Chairman Janet Yellen piled on at her post-meeting press conference, too, sounding relatively optimistic about growth. Perhaps because of the latest data and Yellen’s own comments, the tone of questioning from reporters seemed much more skeptical to me as well.
Instead of asking why the Fed wasn’t looking to provide even more perceived support to the economy, questions were along the lines of: “Ummm … why are you still sounding so cautious on policy when inflation is picking up … unemployment has dropped below your previously highlighted targets … and volatility is so low?”
Yellen responded by saying that market participants need to understand and appreciate that the path of policy is highly uncertain. She added that if the inflation and jobs data comes in strong, rates could rise sooner and more quickly than the Fed is currently forecasting. And that, frankly, is precisely what’s happening already!
Finally, Yellen stressed that the Fed is continuing to plan how to exit from its excessively easy policies, and that more information will be forthcoming soon. She claimed that shouldn’t send a signal about the direction of policy. But have you ever been involved in extensive planning discussions about contingencies that are either A) never going to happen or B) are getting further out in time, rather than sooner? Yeah, me neither!
Bottom line: I think it’s clear that a drumbeat is getting steadily louder around the world. I’m talking about the drumbeat toward tighter money.
It’s not just the U.S. Take New Zealand. The Reserve Bank there started raising its benchmark interest rate in March. It has since followed up with two more 25-point hikes, including one last week. That leaves its key rate at 3.25 percent, and post-hike commentary suggests another increase is coming soon.
Or how about the U.K.? Bank of England governor Mark Carney, hopped across the pond from Canada to take the reins in July 2013. He was widely considered an uber-dove, someone on the order of Ben Bernanke, and he delivered on that view initially.
He talked about keeping interest rates pegged to the floor basically forever and continued the U.K.’s aggressive QE program. But what is he doing now? He’s completely changing his tune!
He just gave a speech last week, the key takeaway of which was “We’re going to raise rates sooner than you think, Mr. Market!” Other policymakers and economists have echoed that message since then.
|The cost of ground beef has gone up 11 percent and pork has increased 9.4 percent since last spring, according to US Department of Labor statistics.|
Here in the U.S., signs were pointing toward tighter money even before today’s meeting. Several Federal Reserve members have recently spoken out against the extreme market complacency their policies have caused. They have also spoken more optimistically about the economy, and faced an increasing amount of pushback from the academic community about their high-risk, excessively easy policies.
And of course, we got the blockbuster consumer inflation report yesterday out of the Bureau of Labor Statistics. It showed widespread inflation across a whole host of goods and services. Heck, things are so bad even the New York Post is talking about “a barbecue season bummer” caused by surging meat, poultry, and fish prices.
In sum, there has never been a more appropriate time — a more opportune time — for the Fed to shift even further toward tighter monetary policy. I believe that’s likely to happen at the next couple of meetings, and indeed, it is already happening to some degree since QE is going to disappear entirely by this fall. Short-term interest rate hikes should follow not long thereafter.
All else being equal, that should lead to higher interest rates across the board. It should also boost the value of the dollar vis-à-vis currencies like the euro. That’s because the European Central Bank (ECB) is well behind the U.S. in the monetary policy and economic cycle.
“There has never been a more appropriate time — a more opportune time — for the Fed to shift even further toward tighter monetary policy.”
It doesn’t have to derail the entire stock market, as long as economic growth persists in a way that supports earnings growth. But with complacency running high and some parts of the market looking increasingly frothy, I’m focusing on highly rated stocks in sectors wrapped up in their own private, secular bull markets rather than just “buying the market.”
So that’s my blueprint for investing success … and my take on the Fed’s latest move. But I’m interested in what you think about the Fed’s latest step. What impact will the elimination of QE have on the markets and interest rates? Or your investing style?
Also, do you think the Fed is behind the curve – and should act more aggressively? Or do you think the Fed is being too aggressive in light of the state of the economy?
You can share your comments here, and I’m sure the discussion will be a lively one!
|OUR READERS SPEAK|
Speaking of the Fed and the side effects of its reckless policies, many of you chimed in on how prices are going up all around you — the very definition of high inflation.
Reader Ken said: “Everyone who has been to a supermarket recently knows that everything has increased in price quite substantially. The only ones who don’t know this are the bean counters in D.C. Even the IMF says raise minimum wage to counter this trend. Also an increase for senior citizens would not go amiss!”
Then there’s Reader Richard J., who said: “Either the Feds are trying to pull the wool over our eyes, or they have their heads so far up their derrieres that they will never again see the light of day. Everything is higher in price because retailers have down-sized everything. A pound is now 14 oz., toilet paper rolls and paper towels have less on the rolls … Would I like to have 15 minutes at a Fed meeting with no interruptions !!!”
And Reader R.J. really got me laughing with this comment on how the government will just turn up the heat on its book-cooking stove if prices rise too much:
“Inflation is of course starting to be a problem. But the folks that ‘calculate’ the numbers will start switching components to appease the Fed.
“Eggs too expensive? We can switch to tree bark. Oranges burning a hole in your pocket? Switch to Tang powder. Airfare sky high? Hitch a ride on a cargo boat, who cares if it takes 3 weeks to cross the Atlantic!”
Right on, R.J.! Any other thoughts you would like to share on the cost of living are always welcome at the website. Just go here to share with your fellow investors.
|OTHER DEVELOPMENTS OF THE DAY|
ISIS militants are now starting to take aim at Iraq’s oil infrastructure, striking the key Baiji oil refinery about 140 miles northwest of Baghdad. It’s unclear who remains in control at the facility, which produces gasoline and other fuels for the domestic economy.
Is General Motors (Weiss Ratings: GM, B) “fixed”? CEO Mary Barra told Congress it was today, despite ongoing concerns about defective parts, massive recalls, and more. Do you buy it? Let me know right here.
Guess people aren’t snapping up enough Barcaloungers! Shares of La-Z-Boy (Weiss Ratings: LZB, A-) fell sharply after the furniture company missed revenue estimates in the fourth quarter. On the other hand, shares of computer software maker Adobe Systems (Weiss Ratings: ADBE, C-) jumped after the company beat revenue and earnings forecasts for the fiscal second quarter.
Reminder: You can let me know what you think by putting your comments here.
Until next time,