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JPM Pulls Forward Date Of First Rate Hike

Tyler Durden's picture


Is good news about to become the ultimate bad news. JPMorgan's Michael Feroli notes that (for the first time in recent memory) is pulling forward their projected date for Fed tightening and the inevitable end of the free-money cycle. Based on a belief in the committee's limited appetite to wait in inflation and today's report, JPMorgan notes a Q2 tightening seems plausible. Of course, this will be repeated mantra like as evidence of escape velocity and the status quo is back but, as we noted here, while policy economists claim that interest rates can be “normalized” at no cost; a more likely scenario is that policy “normalization” leads us directly into the next bust.


Via JPMorgan's Mike Feroli,

We are pulling forward our projection for Fed tightening (the first time we have done so in recent memory); we now see lift-off occurring in 15Q3, rather than 15Q4. For year-end 2015 we see the funds rate at 1.0%, for 2016 2.5%, and for 2017 3.5%.

The inexorable decline in the unemployment rate, alongside firming core PCE inflation, is dramatically reducing the degree to which the Fed is missing on its mandate. It's true that the decline in unemployment is occurring alongside anemic GDP growth (we are also today lowering our tracking of Q2 GDP from 3.0% to 2.5%), but the Fed's mandate is not to ensure strong productivity growth, it's to get the economy back to full employment and price stability, and even broad measures of labor underutilization have been showing marked improvements in recent months. It's also true that wage inflation has not materially accelerated, but unit labor costs are picking up, and we believe the Committee has only limited appetite to wait on inflation until they can "see the whites of their eyes."


Indeed, after today's' report a Q2 tightening seems plausible. If the unemployment rate continues the recent surprising pace of descent such a move is even likely; nonetheless, we hope and believe better productivity and labor supply outcomes will slow the pace of decline in unemployment in coming quarters. We do not see the recent data as cause to accelerate the pace of tapering; there has been little agitation -- even from the hawks -- for such a move.

And what happens when rates rise... (as we detailed here)

It stands to reason that when the Fed eventually lifts
interest rates, we’ll see the usual effects. After a sustained rise in
rates, you can safely bet on

  1. Fixed investment and business earnings dropping sharply
  2. GDP growth following investment and earnings lower
  3. Many people losing their jobs
  4. Risky assets performing poorly

These consequences follow not only from the arithmetic of debt
service and present value calculations, but also from the mood swinging
psychology of entrepreneurs, lenders and investors.

Yet, policy economists claim that interest rates can be “normalized” at no cost.

rate hikes 6

rate hikes 7

rate hikes 8

Now, many readers will surely dismiss these results by insisting that
“this time is different.” We beg to differ. By our estimates, the
economy and financial markets are as vulnerable to higher rates as
they’ve ever been. Here are a few reasons:

  1. The present expansion is weaker than any other post-World War 2
    expansion, suggesting that it won’t take much of a slowdown to push the
    economy into recession.
  2. Monetary policy has been exceptionally loose for longer than ever
    before, allowing financial markets more time to become overpriced and
  3. There are many more risk-takers in the global economy who’ve learned
    how to exploit cheap dollar policies than there were in, say, 1955, the
    start of the period shown in the charts.
  4. Most importantly, aggregate debt is at or near record levels, not only in the U.S. but also in other large economies.

Bottom line

Our conclusion is to reject forecasts calling for the economy to
power right through interest rate hikes without stumbling. A more likely
scenario is that policy “normalization” leads us directly into the next
bust. Alternatively, the Fed might abort its planned rate hikes,
allowing economic and financial market imbalances to continue growing.
Either way, we can expect recurring booms and busts until our monetary
approach is rebuilt on stronger policy principles.


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Thu, 07/03/2014 - 10:37 | 4921389 ENTP
ENTP's picture
  1. Fixed investment and business earnings dropping sharply
  2. GDP growth following investment and earnings lower

So if GDP "growth" is going to move lower, I'm going out on a limb and saying -2.9% isn't the best starting point.

Thu, 07/03/2014 - 10:41 | 4921409 Manthong
Manthong's picture

JPMorgan notes a Q2 tightening seems plausible

.. and that the Vulcans will make first contact then is plausible, too..

Thu, 07/03/2014 - 10:56 | 4921459 gh0atrider
gh0atrider's picture

gh0atrider is hoping everyone is moving into their positions for July 15th.  One last big offensive by the SLA!

Thu, 07/03/2014 - 11:02 | 4921475 Stackers
Stackers's picture

And what happen when the US 10 year normalizes back to 5-6% ?

Thu, 07/03/2014 - 11:05 | 4921484 gh0atrider
gh0atrider's picture

Debtocalypse Now

Thu, 07/03/2014 - 11:23 | 4921552 American Dreams
American Dreams's picture

The fed blows themselves up by raising rates.  Not fuckin likely, ever, period!

Know your enemy


Thu, 07/03/2014 - 11:24 | 4921559 gh0atrider
gh0atrider's picture

The Feds would probably like to give themselves eternal life too.  What they want in the end does not matter.

Thu, 07/03/2014 - 11:31 | 4921592 yogibear
yogibear's picture

Not fuckin likely, ever, period!

Exactly! Their stuck.

Thu, 07/03/2014 - 11:39 | 4921627 Pheonyte
Pheonyte's picture

The Bernank has already said as much: "No Rate Normalization During My Lifetime"

Thu, 07/03/2014 - 15:36 | 4922506 nidaar
nidaar's picture

Why they'll just print moar.. Don't really see a problem here...

Thu, 07/03/2014 - 12:33 | 4921827 RaceToTheBottom
RaceToTheBottom's picture

FED: "Must, keep, that balloon underwater".....

Thu, 07/03/2014 - 11:06 | 4921487 ENTP
ENTP's picture

The 10 year will not be allowed to normalize, it can't.  We don't have a fiscal policy issue, we have a math issue and we cannot afford that interest.

Thu, 07/03/2014 - 11:28 | 4921583 Cthonic
Cthonic's picture

Higher rates might simply mean a quicker return to, and larger magnitude of, quantitative easing.  Separately the Fed could stop reinvesting the interest income of their bond hoard and instead forward it to the Treasury (who would, circularly, use it to pay higher interest)...

Thu, 07/03/2014 - 11:00 | 4921468 explosivo
explosivo's picture

That's Q2 2063.

Thu, 07/03/2014 - 11:57 | 4921700 pakled
pakled's picture

". and that the Vulcans will make first contact then is plausible, too."


Or finding out that ZH is a one-man operation being run out of Brad Pitt's garage.

Thu, 07/03/2014 - 10:46 | 4921434 MeMongo
MeMongo's picture

Mongo can only respond to this news like this!

Thu, 07/03/2014 - 11:00 | 4921469 JRobby
JRobby's picture

Japan - Fail


The printing press is not the way out.

Thu, 07/03/2014 - 11:29 | 4921584 American Dreams
American Dreams's picture

Japan went on for over 30 years, with what, a 300+ percent debt/GPD ratio.  Last I checked the USSA had a 105 percent or there abouts, they got a loooong way to go brother.  The only thing stopping the USSA at this point is that collar called global reserve currency, once thats gone just watch how many chits the fed creates.  Gonna make head explode trying to do the math. 

No more lies, no more lies


Thu, 07/03/2014 - 11:45 | 4921649 El Vaquero
El Vaquero's picture

Once reserve currency status goes away, the fed is not ghoing to have to create those chits.  They'll come flooding back to us in a hurry. 

Thu, 07/03/2014 - 11:37 | 4921616 CrashisOptimistic
CrashisOptimistic's picture

You, sir, have it right.

These wackos are wandering around like -2.9% never happened.  GDP is an actual measurement and yes blah blah about implicit price deflator, but it's an actual measurement.

It's not a survey of people asking what they feel.

Thu, 07/03/2014 - 10:37 | 4921392 NoDebt
NoDebt's picture

"a more likely scenario is that policy “normalization” leads us directly into the next bust."

Well, it always has in the past.  

And, I'll add, couldn't this economy, with all it's renewed strength and energy, support some tax increases, too?  Oh, surely it could.  Surely.

Thu, 07/03/2014 - 10:43 | 4921422 pods
pods's picture

This economy is going to do a faceplant well before 3Q2015.  


Thu, 07/03/2014 - 10:45 | 4921433 NoDebt
NoDebt's picture

Q1 2014 GDP says we already have.  Many other indicators say we already have (worldwide shipping numbers come quickly to mind).  But the headline unemployment numbers and ISM are screaming "don't look behind that curtain!'

I'd recommend you take their advice and not look behind the curtain.  You don't want to see what's back there.

Fri, 07/04/2014 - 07:30 | 4924258 marathonman
marathonman's picture

Even with all the QE the economy was heading to the toilet.  The Fed is pulling the QE so it won't be blamed as much for the next downturn.  Then again it could just be setting us up for the coup de grace that strips away reserve currency status and forces us on the IMF SDR.  Whateever it takes.

Thu, 07/03/2014 - 10:47 | 4921439 LawsofPhysics
LawsofPhysics's picture

With all due respect pods, the Japanese disagree with your thesis.

Thu, 07/03/2014 - 11:05 | 4921490 pods
pods's picture

Very true that the Japs have been able to keep the music playing for way longer than anyone expected.  

I don't think the US can duplicate that one though, especialy if the FRN loses reserve status.

The FSA will burn the place to the ground if they cannot afford their stuff because the gravy dries up. 


Thu, 07/03/2014 - 10:38 | 4921396 astoriajoe
astoriajoe's picture

"we now see lift-off occurring in 15Q3, rather than 15Q4."

I don't think I would have used 'lift-off' in this context.

Thu, 07/03/2014 - 10:40 | 4921408 SHEEPFUKKER

I think jumping off a cliff(or high rise building in the bankers case) could be considered lift off. 

Thu, 07/03/2014 - 11:02 | 4921474 IANAE
IANAE's picture

Looking at equities lift-off occured some time ago...

Thu, 07/03/2014 - 11:08 | 4921500 TheReplacement
TheReplacement's picture

rip-off is what they meant.

Thu, 07/03/2014 - 10:38 | 4921399 IANAE
IANAE's picture

How accurate have these prognostications been historically...are they better or worse than the GDP picks?


Thu, 07/03/2014 - 10:47 | 4921424 buzzsaw99
buzzsaw99's picture

Monkeys flying out of Feroli's butt is infinitely moar likely than a multi-year ffr rate hike.

Thu, 07/03/2014 - 10:40 | 4921403 buzzsaw99
buzzsaw99's picture

For year-end 2015 we see the funds rate at 1.0%, for 2016 2.5%, and for 2017 3.5%...

OMG!! LOLOLOLOLOLOLOLOLOL!!!!!!!!!!!!!!!!!!!!!!!

Thu, 07/03/2014 - 11:11 | 4921509 NihilistZero
NihilistZero's picture

I wouldn't laugh so hard...TThe FED has to prick this bubble sooner than later otherwise their whole system is doomed (which we all know it is long term anyway).  The only thing that can get the economic motor moving again is organic, wage based spending growth.  The FED has been trying to accomplish this through wage inflation for 7 years and failed miserably.  The only option left is deflation in food, housing and (to the small level the FED can affect it) energy.  Unless the FED member banks want to take an acid bath in their commercial RE loans they have to let residential adjust downward.  It's the only way they can put enough $ in consumer pockets at this point to make a difference.


Thu, 07/03/2014 - 11:25 | 4921565 Nostradamus
Nostradamus's picture

On the contrary, I think that the longer they can preserve the bubble conditions before it actually bursts, the better it is for the Fed and the banks that they represent.  Pricking the bubble now simply returns the nation to 2008 financial conditions all over again, except even worse, making the "recovery" experienced since then completely pointless.  They ride this out until inflation becomes a big problem.  Then they pretend to try and fight it with higher rates that aren't high enough to actually do anything.  Meanwhile the banks profit off of the inflation by their privilege to have first access to all money entering into the system.

Thu, 07/03/2014 - 11:37 | 4921614 NihilistZero
NihilistZero's picture

They ride this out until inflation becomes a big problem... Meanwhile the banks profit off of the inflation by their privilege to have first access to all money entering into the system.

Dude, inflation is a big problem RIGHT NOW!  How can t he banks make profit off of first access when their is no volume and everything is at a standstill???  Mortgage origination and small biz lending are DEAD.  You think banks wouldn't trade their miniscule excess reserves profits for keeping their commercial RE portfolios whole???  Every brick and mortar biz with a lease that folds hurts banks balance sheets exponentially.  It would be political suicide on a legendary scale to push through a front door bailout of these loans.  The only way those loans can be kept from belly up status a while longer is getting consumer spending up and lowering housing costs is the most direct way the FED can influence that outcome.

Thu, 07/03/2014 - 13:46 | 4922102 Chuck Knoblauch
Chuck Knoblauch's picture

Government policy is to ignore or deny any problem exists.

They are very confident in the Federal police force they've created to protect them.

They knew widespread civil unrest was inevitable.

It's going to be interesting watching them manipulate the price of food.

Illegals get hot meals.

American citizens can go to hell.

I think the Queen wants to pick a fight with his own people.

Unless, of course, he doesn't consider Americans his people.

Thu, 07/03/2014 - 10:44 | 4921405 Chuck Knoblauch
Chuck Knoblauch's picture

How many riots are expected with every point increase in the rate?

We're going to need a new metric to measure the casualties.

This is how the government is going to implement martial law.

This is the false flag attack we've been expecting.

Thu, 07/03/2014 - 10:59 | 4921467 El Vaquero
El Vaquero's picture

The beauty of it all is that in this kind of scenario, the people who would be enforcing martial law would be watching their pensions evaporate.

Thu, 07/03/2014 - 13:40 | 4922080 Chuck Knoblauch
Chuck Knoblauch's picture

The Pretorians will be watching some of their relatives suffer and die.


Thu, 07/03/2014 - 11:03 | 4921477 JRobby
JRobby's picture

Assume there will be rioting before a 2016 funds rate of 2.0 - 2.5. No one has a clue specifically how it ends but badly is a good generalization.

Thu, 07/03/2014 - 11:04 | 4921480 Wait What
Wait What's picture

we need to get some metrologists on ZH. they'll come up with any measure you can imagine.

i'm partial to 'Dead Reckoning' myself.

Thu, 07/03/2014 - 11:08 | 4921501 pods
pods's picture

I like DOBA myself.

Dead On Balls Accurate. (From My Cousin Vinnie)

Thu, 07/03/2014 - 10:40 | 4921406 NoWayJose
NoWayJose's picture

A rate hike? Jamie Dimon must be rolling over in his grave! No wait - just a little while longer until that happens...

Thu, 07/03/2014 - 10:43 | 4921421 LawsofPhysics
LawsofPhysics's picture

"Normalization of rates"  - LMFAO!!!

Go ahead, raise rates, I double dog dare you.  Once again, the paper-pushers in the financial sector have a gun pointed at their own head and are threatening to shoot. 

Hank "tanks in the streets" Paulson to fly to D.C. in 3...2...1...

Thu, 07/03/2014 - 11:05 | 4921485 JRobby
JRobby's picture

He should be in Paraguay about now.

Thu, 07/03/2014 - 11:28 | 4921577 Nostradamus
Nostradamus's picture

They could eventually "normalize" rates.  But when inflation is running at 10% per annum, a 5% Fed funds rate isn't exactly what anyone would call tight.

Thu, 07/03/2014 - 10:44 | 4921425 caShOnlY
caShOnlY's picture

the stawks, the stawks, the stawk mawkit is on fire!! we don't need no water let the muthafukka burn!!!

Thu, 07/03/2014 - 10:47 | 4921436 Chuck Knoblauch
Chuck Knoblauch's picture

Diamon doesn't have cancer.

He plans to leave the country.

He plans to fake his own death.

We will hunt him down like a dog!

Thu, 07/03/2014 - 10:47 | 4921437 Rompoculos
Rompoculos's picture

We're in a hot wet vice, but not in a good way.

Thu, 07/03/2014 - 10:49 | 4921446 youngman
youngman's picture

The Chairwoman saiid yesterday..that she was not going to raise rates like they used to...she wants regulations now to do the work....they cant raise rates..the USA would crash faster than it already is..Belgium cant buy that many bonds...just think if we paid more in interest than we take in from tax will they explain that that is a good that will happen...

Thu, 07/03/2014 - 10:51 | 4921450 buzzsaw99
buzzsaw99's picture

she prefers that regulations not do the job that not raising rates wouldn't do either.

Thu, 07/03/2014 - 11:43 | 4921640 CrashisOptimistic
CrashisOptimistic's picture

I could have sworn Q1 GDP was -2.9%.  I could have sworn I saw that.

They are all wandering around pretending it never happened.

Wait!  Wait!  What am I thinking?  It's an election year, an important one, how can they NOT pretend?

Thu, 07/03/2014 - 10:52 | 4921451 BobTheSlob
BobTheSlob's picture

NOT GOING TO HAPPEN. At the most we'll see a rise in a few basis points here or there. The US can't afford anything more than that...fallout from being broke broker brokest.

Thu, 07/03/2014 - 11:01 | 4921472 El Vaquero
El Vaquero's picture

Never say never.  The cunts are desperate, and desperate people do stupid things.  This is a no-win situation. 

Thu, 07/03/2014 - 11:18 | 4921533 NihilistZero
NihilistZero's picture

Does the US .gov really care what the rate is?  FED raises the funds rate to prick the credit bubble and then buys treasuries under the table through front nations.  Best of both worlds as they can be seen as tough on inflation while still monetizing the debt.

Thu, 07/03/2014 - 12:41 | 4921853 Nick Jihad
Nick Jihad's picture

Close, but not quite. The Fed has seen that their efforts to juice the money supply are unavailing, as they have simultaneously dried up the collateral supply. The Fed will increase interest rates in order to boost the Federal deficit, thereby increasing Treasury debt issuance, thus correcting the critical shortage of collateral.

(Not sure if i'm serious or not :-)

Thu, 07/03/2014 - 10:56 | 4921458 Kirk2NCC1701
Kirk2NCC1701's picture

I'm more interested in the USD as GRC dump.  Until then... Same as it ever was.

Best to opt out with Real Assets, PM, Energy and Cash.  Maybe a few Bitcoins.  Just got wind of Peter Schiff's company (Euro Pacific Capital) to be the first to accept BTC for AU.

Like Kirk's been saying for a 'long' time (1 year):  CryptoCurrencies + PM + Barter = Parallel Economy

In time, the inherent virtues of the Parallel Economy will eclipse (starve out) the Official Economy.

Thu, 07/03/2014 - 10:56 | 4921460 khakuda
khakuda's picture

He wasn't listening to Janet "I don't see a bubble and if I did I'm not going to raise rates to stop it anyway" Yellen yesterday.

Thu, 07/03/2014 - 10:58 | 4921462 orangegeek
orangegeek's picture

bond markets set rates, not the Fed


the only reason the Fed has had their hand on the switch is because of their printers


these printers are slowing down - means less influence by the Fed


so yellen can set rates all she wants - just bring your printer yellen - and if you don't have one, then I guess you are fucked

Thu, 07/03/2014 - 11:04 | 4921478 El Vaquero
El Vaquero's picture

If they raise rates, there is still the option of paying interest on excess reserves.  Don't count those printers out just yet, even if they really are tapering, which I'm not fully convinced of yet.

Thu, 07/03/2014 - 11:07 | 4921494 vote_libertaria...
vote_libertarian_party's picture

raise rates???



Thu, 07/03/2014 - 11:12 | 4921522 i_fly_me
i_fly_me's picture

"For year-end 2015 we see the funds rate at 1.0%, for 2016 2.5%, and for 2017 3.5%."

I'll take the under for a bitcoin.  Anyone want the other side?

Thu, 07/03/2014 - 12:08 | 4921538 buzzsaw99
buzzsaw99's picture

jpm has the under. this is a ruse to sell derivatives and options to the rubes against a rate hike which they know is never coming.

edit: even bill gross knows better:

Thu, 07/03/2014 - 11:19 | 4921539 Nostradamus
Nostradamus's picture

Here's the thing: the Fed might have rates at 3.5% at the end of 2017, but when inflation is running at 5%, 8%, 10% annually, they'll still be behind the curve and inflation will actually continue to worsen.  In order to stop the inflation they'll have to get out in front of it and raise rates above the rate of inflation in order to stop the bleeding, much like Volker did in the early 1980's when the Fed funds rate was raised to 19-20%.  This Fed will not do that in my opinion, because to do so in the present era would be to destroy the banking system as we currently know it.

Thu, 07/03/2014 - 11:52 | 4921683 GooseShtepping Moron
GooseShtepping Moron's picture

Not to mention that it would tank the federal budget quicker than a heart attack. When rates rise (which they must eventually) we'll have to see austerity in Washington to a degree that is unimaginable at present; but the federal government, which has done nothing but grow for the past 80 years, cannot grow anymore. It will have to shrink or die. Wha this means for SocSec and Medicare is obvious.

Thu, 07/03/2014 - 12:37 | 4921839 Nick Jihad
Nick Jihad's picture

If you water your garden every day, the thirsty plants will take over from the hardy plants. If you then stop watering, the thirsty plants die, and you have nothing.

Thu, 07/03/2014 - 13:09 | 4921959 yogibear
yogibear's picture

We'll leave this call to the Fed's main blowjobber, Hilsenrath.

Thu, 07/03/2014 - 13:16 | 4921999 DR
DR's picture

"2017 3.5%."

How is the Fed gonna pay 3.5% IOR/FFR on a cash store of +10 trillion$?

Thu, 07/03/2014 - 13:36 | 4922067 Chuck Knoblauch
Chuck Knoblauch's picture

Sell Idaho to China.

Thu, 07/03/2014 - 13:52 | 4922127 moneybots
moneybots's picture

"... Q2 GDP from 3.0% to 2.5%), but the Fed's mandate is not to ensure strong productivity growth, it's to get the economy back to full employment and price stability..."


2% inflation is not price stability.  The FED's intention is to destroy price stability.

Thu, 07/03/2014 - 13:59 | 4922168 moneybots
moneybots's picture

"we believe the Committee has only limited appetite to wait on inflation until they can "see the whites of their eyes."


The FED has their eyes wide shut, otherwise they would have already seen the white of their eyes.

Thu, 07/03/2014 - 19:05 | 4923142 SweetDoug
SweetDoug's picture







Isn't JP Morgan part of the FED?

They ought'a know, eh?


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