Summary: On Thursday I posted “Ignore The Bond Bears, The Fed Will Not Raise Rates“. Many on Wall Street disagree — most of whom since 2012 have expected a cycle of rising rates to begin really soon. Such as J. P. Morgan’s prediction of a rate increase in December. Friday’s data confirms my forecast in a big way.
First, yet another in the almost endless series of economic indicators showing the US economy stuck in “slow”. Retail sales — critical in our consumer-driven nation — is up only 2.9% YTD YoY, with September +3.4% YoY (NSA) — see the report. We should be at peak growth in this expansion; instead growth faded in Fall 2014 and has remained slow since then.
Second, with this data the Atlanta Fed’s GDPnow model lowered its prediction for Q3 real GDP to +1.9%. The forecast on August 5 was for 3.8% growth. On October 28 we get the advance estimate from the BEA. The average GDP growth since the trough in Q2 of 2009 has been 2.1%. The data for Q3 shows no change in that slow growth.
Two percent GDP growth is too low for the Fed to risk raising rates. Any slowing from the increase plus an external shock (bad luck) would start a recession that the US is ill-prepared to face. Nor are there any signs of overheating that would require raising rates.
Conclusions
The Fed has made mistakes before, and so it is possible that the Fed might raise rates one or two times. But they see these numbers as clearly as you and I. They are unlikely to act uncharacteristically boldly.
Raising rates would show that the Fed misunderstands two of the essential facts about the US economy — that growth has been slowing for decades (even more so on a per capita basis, ignoring growth from a larger population) — with little evidence that will change in the foreseeable future. That is unlikely.
The oddity is that we do not see that. If we did, we would force the presidential candidates to discuss how to restart America’s growth — instead of bickering about personalities and soundbites. What will it take to force us to see this?
For More Information
If you liked this post, like us on Facebook and follow us on Twitter. See all posts about economic growth, about the Federal Reserve, about monetary policy, about secular stagnation, and especially these…
- The Miracle Of This Growth In The US Economy.
- Why Investors Are Deceived By News About The Economy.
- Why new home sales are slow, and will remain so for a long time.
- To understand the jobs report, see the state of the economy.
- About the new jobs report: Ignore The Bulls And Bears – See The Key Trend In The Jobs Numbers.
- Ignore The Bond Bears, The Fed Will Not Raise Rates.
It seems a no-brainier to keep rates down in this slow growth period, but, I believe at least two powerful factors are driving the Fed in a direction which seems illogical.
1. Bank profits. An increasing number of banks are hurting. Deutsche Bank is just the biggest. They live off the spread. Rates are so low there’s no profit in borrowing short to lend long, any more. This squeeze leads them to junk investing.
2. The liquidity trap. Everyday new signs point to a new downturn. There is no place to go to stimulate spending with lower rates. They got to boost, now, so they can cut, later.
Bill,
I agree that both of these are reasons given for raising rates.
(1) Yes, many bankers have the mistaken impression that increased rates will improve their business. In fact they depend on spreads and business activity (among other factors), which have an uncertain relationship to rates.
(2) Re: the liquidity trap. Raising rates to give the ability to cut in a recession makes as much sense under current circumstances as starting a fire in order to put it out.
There are other factors impelling some Fed governors to raise rates. Belief that such low rates are “unnatural” (historically false, but commonly believed). Belief that low rates create investment bubbles (ditto) and inflation (ditto).