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What's The Real Reason The Fed Is Raising Rates? (Hint: It's Not Employment)
Submitted by Roger Thomas via ValueWalk.com,
Sometime this fall, the Federal Reserve will begin a new tightening cycle.
Publicly, Federal Reserve officials appear to be confident that the American labor market may be overheating or that inflation may be on the way in.
Is this the case?
In looking at Employment, Industrial Production, Consumer Prices, Capacity Utilization, Retail Sales, and the West Texas Intermediate price of oil, there's no evidence that the Fed should raise rates.
What is the Fed worried about?
Probably, and almost exclusively, it's financial asset price appreciation.
Here's a review.
Employment
A picture of employment growth against the Federal Reserve's target interest rate follows. Interestingly, in past tightening cycles, employment growth was either accelerating or flat.
That's not the case this time around. Employment growth is decelerating, and has been decelerating since February 2015.
Industrial Production
A very similar story to Employment is present in the Industrial Production picture. Except for one instance, Industrial Production growth is either accelerating or flat when the Fed raises rates.
That's not the case this time around.
Consumer Prices
Here's the Consumer Price picture.
As with employment, the Fed almost always raises rates when inflation is accelerating.
That's not the case this time.
Capacity Utilization
Capacity Utilization has a very similar story to Industrial Production.
Price of Oil
Here's the oil price picture.
A less interesting story emerges here, probably because, of the indicators mentioned here, oil is of least policy value.
Retail Sales
As with the other economic indicators already mentioned, a tightening cycle this fall would be quite odd when looking at Retail Sales growth.
Summing Up the Non-Causes
As indicated, it's probably not the real economy behind the Fed's thinking.
* * *
Here's what's really concerning Fed officials.
Equity Values
It's equity values that has the Fed concerned.
The Fed sees it's ultra-low monetary policy as having been incredibly stimulative to financial assets. And, they don't want another technology bubble.
So, to avoid a technology bubble, now's the time to start raising rates.
Since the last time the Fed started a tightening cycle, the S&P 500 is up 62%, about where the mid-90s experience of 63% was. It's well short of the +191% in the late90s/early 2000s equity markets produced. It's also better than the -21% experienced in the mid-2000s.
Interestingly, the P/E ratio confirms a similar story.
In looking at the Shiller P/E ratio, perhaps a better rule than the Taylor rule to predict Fed tightening moves today is the P/E ratio rather than inflation and unemployment. Just think about it.
It's an interesting experiment for the Fed this time around, being concerned about the financial economy more than the real economy.
Fed Conclusion
Overall, although Federal Reserve officials publicly claim that the reason for impending rate hikes is that the American economy is doing well, there's not a lot of evidence, at least based upon prior tightening cycles, that it's the real economy the Fed is worried about.
Rather, the pending beginning of the Fed's rate hiking season likely stems almost exclusively from concern about financial markets.
Perhaps unsurprisingly, the Fed doesn't want another technology-type bubble (interesting that the Fed thinks it knows the intrinsic value of stocks better than the market). At least, that's what the data appear to suggest.
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they don't want another tech bubble??
remind me again - what is the f/w PE for Amazon, LinkedIn, Facebook, and all the other members of the this-time-is-different crowd?
ya this is closing the barndoors after the horses get out. shoulda worried about this a couple years ago.
edit: still don't believe they will this year. Plenty of excuses- commodity prices dropping, "low" inflation(at least their fictional CPI), trouble in china, "strong" dollar, etc
consumer prices barely above zero %?
My theory is that they haven't got a fucking clue what they are doing, and it's been 6 years since they did anything with rates... so hey lets just twiddle the dials a bit.
Real reason is because
The Feral Reserve has been reducing its balance sheet to save its own ass and in case of an audit.
And they can't do future QE with rates so low now without them going negative
So raise rates now to allow reflating the Fed balance sheet later.
Interesting, the Fed rate rising also seems to correlate to those vertical gray areas on all the charts. Cooncidence?
I wonder what those areas represent?
The market is raising rates not the Fed.
The Fed is being dragged along by market action.
good point, before rate hikes in the US you will probably see a negative funds rate, FED wont ever raise the rate if not forced too since they know it will be the start of a new recession guaranteed!
They want to raise it so they can re-lower it during the next economic retraction. If you are still at zero you cannot even give the impression of any monetary magic.
Barely above zero for calculating social security benefit increases. Barely less than 7% if you arent living in a fantasy land.
Here's a little puzzle for the "no inflation" crowd. In the year 1995, what did you need to have in savings in order to retire with a modest lifestyle? What do you need today? I'll bet the numbers reflect at least a 5-6% compound rate increase in your required savings (i.e. 600k then, 2M today).
I'm 45 w/~2m (if u include real estate equity) & I don't feel like we're anywhere near being able to retire! if I could get 5% on something safe I'd be done tomorrow but in this world I'm just trying to figure out how to mitigate risk/loss when this ponzi of ponzis chernobyls...
they better start normalizing, there is no excuse not to
all these things-markets-banks-government-were all created to serve Americans.
they have been totally perverted to where THEY believe we exist for THEIR exploitation.
the only response is withdrawal of consent
Rather, the pending beginning of the Fed's rate hiking season likely stems almost exclusively from concern about financial markets.
Tell me another fairy tale. The Fed has done more than the Chinese to blow a stock market bubble, real estate bubble and bond bubble to create a wealth effect to sustain a faltering US economy.
If Yellen wanted to burst the stock market bubble, she could accomplish that in a nanosecond by saying that equities are overvalued. But then, creating bubbles is the Fed's job when the real economy is collapsing and labor participation rate is at 30 year lows.
Yes, the Fed will raise interest rates in September. That would be September 2020. Meanwhile all this talk of a robust US economy sustains dollar strength as US gets real goods for exporting worthless fiat.
Roger Thomas is now officially in my "Kool-Aid" drinkers column.
Perhaps he's auditioning for a spot on CNBS?
Yeah baby, traditional economics is gone bye-bye. Think more like Greece, Illinois, Puerto Rico, Argentina, Venezulela... Zimbabwe.
RE
When Yellen, or if any Fed official ever says this, I will run through Wall St buck ass naked.
The Fed has one mandate: The number (DJIA/S&P/NSDQ) must go up. AT ANY COST.
They're all a bunch of nutcases.
All assuming they really do raise rates. Remember they've been talking about raising rates for 2 years.
Huh?
WTF have you been?
They started talking about raising rates the second they started lowering rates. Try 8 - 9 years ago.
Our prices are INSANE.
#41
Hey! That was my laundry number in boot camp at Parris Island. You never forget your laundry number.
Same reason Greenspan popped the Tech bubble in 2000. Bunch of lying amateurs.
No, it's primarily because they've painted themselves into a corner and don't want to appear impotent fools. They also need a little rope to pull if things deterioriate more. And they know they should have done it sooner. Plus you add up the fact that 0-25 range to explicit 25 bps is more a signaling change than having any actual economic impact anywhere on the interest rate eco-system makes it probably neutral in terms of market impact.
I thought the FED got paid in Goldman shares? I am pretty sure they don't get paid in Gold. The increment is 1000 Goldman share per speech...not need to show up for said speech
I laugh everytime I read or hear this.
"IF" the un-fed does raise rates a measly .025 of a point and the street lets out even a faint a fart...Wham! Right back to zero.
Banksters Inc. Thy Lord and thy Master is Wall Street!
An very perverted club.
What comes first? The crash of the economy or the crash of asteroid, either way it is going to chaos and madness... read these prophecies http://revelation12.ca
history rhymes eh ? they are hoping for a controlled asset descent < again > ?
"What's The Real Reason The Fed Is Raising Rates? (Hint: It's Not Employment)"
To forestall the inevitable collapse by having your FedRes banksters engineer the dollar's demise, and then replace the dollar with SDRs--All for your continued profit and plunder.
Liberty is a demand. Tyranny is submission..
The dollar is up on "exit."
"What is the Fed worried about?"
I don't know, but it should be guillotines.
Liberty is a demand. Tyranny is submission..
Wait just one second, Tyler. I've read scores of articles on ZH arguing the Fed was keeping rates low precisely to keep equities high, including may articles suggesting that the Fed was secretly purWchasing stocks. Now they purposely want to deflate the bubble?
Why the fuck does every story that mentions the 'low' unemployment rate that is being parroted by every talking head in the mainstream media completely ignore the real U6 unemployment rate that counts people who have given up looking for work because the job market is so shitty? It is sitting at 10.5% for christ's sake...
"It is sitting at 10.5% for christ's sake..."
That U6 figure you quoted was prepared by a Neo-Nazi Confederate flag wavin Gay supremacist.
Yo'all can't trust them figures.
That 10.5% ain't counted as unemployed cos they is watching Reality TV.
That "Consumer Prices" chart is hilarious. Thanks for the laugh. I needed it.
Nice take on the Ministry of Truth's numbers.
Now go to the grocery store and see the real prices.
Liberty is a demand. Tyranny is submission..
My dad worked his numbers last month and he says that his homeowner's insurance is going up by 15% this year. Health related expenses by over 20%, auto insurance by 13%, fiefdom rent, property taxes, over 10%, food over 8%, etc. He says he has no idea what he pays in gas, as "they keep raising and lowering it all the time."
The Fed sees it's ultra-low monetary policy as having been incredibly stimulative to financial assets. And, they don't want another technology bubble.
Way. To. Fucking. Late.
And lest we forget they blew a nbeautiful echo-bubble in RE that will likely pop with even greater velocity than the first Housing Bubble.
Real unemployment is rising, rising, rising... and has been for decades (35 years). And prices are rising about 9%/yr.
Every article that adopts status-quo measures (statistics) are PURPOSELY misguided, even when the analysis, motivation and conclusion is roughly honest. Why? Because all authors who write articles in ZH know better. They know official statistics are 100% pure lies and BS; nothing but PR.
-----
BTW, the world economy is falling off a cliff so fast right now, that NOBODY on the planet will even imagine a rate cut come September.
The only reason employment numbers are up is because of all the road construction. When the blacktop is done the jobs will be done.
Then again we will probably start building ghost cities like they do in china.
We need to start breaking some windows.
"What's The Real Reason The Fed Is Raising Rates?"
Shouldn't that be, "What's The Real Reason The Fed is SAYING it will Raise Rates?"
The Fed can't raise rates without pricking the bubble. But they can't admit that either. So they want to have their cake (saying they're about to raise rates) and eat it too (continued 0% interest). And we all know Janet really likes her cake.
Actually, it should be "What's the real reason the Fed is saying it might consider the notion that market conditions could warrant contemplation of the possibility of eventually raising rates, data dependent of course".
Publicly, Federal Reserve officials appear to be confident that the American labor market may be overheating or that inflation may be on the way in.
TOTAL FUCKING BULLSHIT ROGER!!!
Unemployment is around 15%. There's no job recovery. Just millions leaving the workforce. The CRB index is near 2009 lows - so much for inflation.
And if near term rates go up, the USD rockets past parity - this nicely fucks the SPX and GDP.
Rates are going up - sure they are - right after I ride my skittle shitting unicorn down wall street.
So, the only real correlation to interest rates is the S&P... which is a non-market.
written by captain obvious
The dollar is under attack--the FED will defend it-----the best way is to make it more desirable--- in the FX world 25 bp is enough to get the ball rolling in your direction-- seems reasonable.
Obviously debt-servicing costs are not an issue when you're still the Big $Dog on the block... Funny though, none of these guys seems to think that geopolitical considerations vis-a-vis the $Dollar, are of any consequence. I guess you just don't come to realize that until up-jumps-the-Devil...
The real reason is geo-political pressure on the dollar.
Last time I checked rates have not been raised!
and they will not be raised.
WTF?
SH
Absolutely correct, the FED cannot raise rates without bankrupting Uncle Sugar. ZH must have accidentally given the Tyler Durden account password to Steve Liesman.
The last time I had my cock sucked was when we were driving back from the OB's office after finding out she was pregnant for the first time in 7 years back in '07
How sad.
SH
I feel your pain. Good thing you've got super han(d)s though.
I am disappointed that all the posts do not get it at all....You are part of the problem......this has nothing to do with any post I just read here. They will raise rates when they are ready to collapse the system because this has all been planned for a long long time. Raising rates will cause a world wide economic collapse. But that is exactly what they want. They are just waiting for the right time. And in my opinion, we are coming to the right time for them before end of year, probably September/October......You all live in the matrix and it breaks my heart...SO many of you think liek children in grade school....Wake up people, we have a very powerful group of people who have been planning the NWO for a long time. Economic collapse was part of their plan. wake up....Yellen is nothing but a pawn. Same as all politicians etc. wake up or die while asleep.
can you share the source of your psychedelic drug supplier ?
I'd like to see a holy-shit two percent rate hike!
The FED doesn't think they have crossed the Rubicon and that raising rates will prevent the crossing. They are too late. The Rubicon has been crossed. The markets will never function like they did prior to the crisis.
Asset inflation?! Which they're only noticing now?! Bologna.
They need to raise rates to prepare for the next crash. Right now, they have zero headroom for their stupid, "didn't work last time but it's all we know" Keynesian methods and they don't want to resort to negative rates.
the bubbles are already bursting, can anyone me tell me the difference between financial markets, the fed, and government, or wait till after the myras are enacted, and then tell me.
bernanke created deflation, when purposely looking past the false reporting of all govt., agencies, for 8 yrs. we've had credit-flation, credit chasing the purchase goods, and thats drying up, so the bubbles will continue to bust, and the crash will put cash- flation hyper-inflation into effect.
if your depent on govt., or very little from savings, the next 8 yrs. are going to be hell.
Dont have to raise rates, just put transaction fees on each HFT
Thanks for proving it ZH
But I mean FED DUHH
Too little too late. Stupid to keep ZIRP so long. It has had marginal at best effect on main street particularly these last two years.
There is no inflation in basket of goods that doesnt measure shares and real estate!
I don't know about this one. I think the only reason they'd raise rates is to NOT lose any credibility they have left.