Submitted by Roger Thomas via Valuewalk.com [4],
If market economists have the Fed right, in about 60 days from now Janet Yellen [5], chairwoman of the Federal Reserve, will announce the first Federal Reserve rate hike in about 9 years.
With the first rate hike pending, an obvious question is - Does the Fed have the timing right?
If you're looking at year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization, the answer is a clear no.
Here's a look.
Retail Sales vs Fed tightening cycles
The following graphic is a look at year-over-year growth in Retail Sales [6] overlaid with the Federal Funds target interest rate.
Fascinatingly, all four of the previous four Fed tightening cycles [7] occurred when Retail Sales were either accelerating or about flat.
This is interesting because Retail Sales in 2015 have been deteriorating all year. Overall, Retail Sales growth peaked in August 2014, and since then have consistently experienced a decline in year-over-year growth.
In the first tightening cycle shown, March 1988 to March 1989, Retail Sales floating about flat, neither decelerating or accelerating.
In the mid-90s (January 1995 to February 1995), Retail Sales were clearly accelerating.
In the late 1990s, Retail Sales were on a clear upward trend.
Lastly, in the most recent tightening cycle, from April 2004 to August 2006, Retail Sales were also clearly on an accelerating trajectory.
This goes to show that there's a first time for everything. Raising rates when Retail has been weakening for around a year.
[8]
Industrial Production
Here's a look at the Industrial Production picture.
Overall,the picture is pretty similar to the Retail Sales picture.
In three out of the four instances, the Fed raised rates [9] when Industrial Production was either accelerating or at least not decelerating.
The sole exception to this observation was the 1988/1989 tightening cycle.
During this period, the Fed decided to raise rates even though Industrial Production was decelerating.
Unsurprisingly, Industrial Production continuously decelerated throughout the Fed's tightening cycle.
This downward is similar to what we might see for the remainder of 2015 and first half of 2016 if the Fed first starts raising rates in September 2015.
Interesting, Industrial Production growth is not far from going negative, so the Fed will more than likely impose a very short tightening cycle.
[10]
Capacity Utilization
Here's a look at the Capacity Utilization picture.
As with Industrial Production, Capacity Utilization was, in most cases, accelerating or at least not decelerating when the Fed decided to start raising rates.
The sole exception, as with Industrial Production, occurred in the late 1980s.
The most interesting observation from this graphic is that year-over-year growth in Industrial Production is negative.
It would be quite amazing for the Fed to raise rates when Capacity Utilization is lower than it was at this time last year.
Perhaps there's a first time for everything (i.e. raise rates before the economy deteriorates too much, because the Fed certainly can't raise rates).
[11]
Conclusion
Overall, if one considers Retail Sales, Industrial Production, and Capacity Utilization as reliable indicators on the state of the U.S. economy [12], then the Fed is either way too late or way too early for a rate hike. Ms. Yellen's Fed certainly does not have the time just right.
If the Fed does raise the Fed's target interest rate [13] in September, it would be coming at a time when year-over-year growth in Retail Sales, Industrial Production, and Capacity Utilization are all decelerating.
Greenspan understood the first derivative, but apparently Ms. Yellen does not.
