If ever there was a chance for The Fed to 'sneak' in a rate-hike while everyone is distracted, it's next Wednesday as Trump Jr testifies to Congress. As former FX trader Richard Breslow remarks, The Fed "woulda, coulda, shoulda [hike] next week... but certainly won't," noting that if they are truly concerned about the "stretched valuations" taking an extended vacation through the summer is the worst thing The Fed can do...
It feels strange but, curiously, not entirely pointless, to suggest the Fed do something that there’s zero chance they will even contemplate. I’m talking about next week’s FOMC meeting and using it as an opportunity to be bold. This is mostly a meeting they hold in mid-summer to justify the fact that no one has any desire to be in Washington DC in August, and September is a long way off.
But taking an extended holiday is precisely what they oughtn’t do. The only thing it will accomplish is forcing, as well as encouraging, investors to carry on with the types of trades every right-minded observer thinks has a large element of recklessness. Which is just a somewhat less nice word for “financial conditions remain benign.”
As you can tell, I’m not in the camp that thinks the way to get inflation is to continue on with policies that are no longer efficacious in producing that desired effect. At this point, ultra-low rates are exacerbating problems that weren’t particularly of concern when the post-crisis response was initiated and are no longer needed for the ones that were.
If you want to see higher wages, fast-tracked investment decisions and raised inflation expectations, then rates can’t be this low. And this isn’t as counter-intuitive or economically unorthodox as it sounds. It’s human nature. They can’t figure out what the new normal is for R* or why. It’s this low because the Fed is actively suppressing it. That’s what you call an uncomfortable truth.
Markets have veritably ignored the previous hikes because these have been the right thing to do yet are expected to be doled out in such a miserly fashion as to have little impact any time soon. And they certainly haven’t slowed the economy. To believe they have, you would have to assume the lag in the monetary policy transmission effect is off the charts -- literally.
Futures are pricing no chance of a move. The markets aren’t set up for it. You’ll cause mayhem in the pits. Well when you have news to get out and don’t want to cause a ripple, what do you do? Make sure it’s released in the Saturday edition or opposite the Super Bowl.
Next Wednesday, coinciding with the meeting, will be the testimony by Trump Jr. before the Senate Judiciary Committee. Sure to have more gawkers than Comey’s day. The Fed can slip in the hike and by the time anyone pays attention it will be old news. Presto chango
For now, no one is buying it...