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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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.

Manthong's picture

JPMorgan notes a Q2 tightening seems plausible

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

gh0atrider's picture

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

Stackers's picture

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

American Dreams's picture

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

Know your enemy


gh0atrider's picture

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

yogibear's picture

Not fuckin likely, ever, period!

Exactly! Their stuck.

Pheonyte's picture

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

nidaar's picture

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

RaceToTheBottom's picture

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

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.

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)...

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.

MeMongo's picture

Mongo can only respond to this news like this!

JRobby's picture

Japan - Fail


The printing press is not the way out.

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


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. 

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.

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.

pods's picture

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


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.

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.

LawsofPhysics's picture

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

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. 


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.


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

IANAE's picture

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

IANAE's picture

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


buzzsaw99's picture

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

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!!!!!!!!!!!!!!!!!!!!!!!

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.


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.

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.

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.

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.

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.

Chuck Knoblauch's picture

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


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.

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.

pods's picture

I like DOBA myself.

Dead On Balls Accurate. (From My Cousin Vinnie)

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...

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...

JRobby's picture

He should be in Paraguay about now.

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.

caShOnlY's picture

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

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!

Rompoculos's picture

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