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The
segment below was written and distributed only to the media within an hour of
last week's Federal Reserve interest rate hike, with excerpts/themes picked
up by various national media. At the prompting of a colleague, I have decided
to post it here along with updated comments:
Tuesday,
August 9th, 12:00pm, PDT-
The
market, uncharacteristically, is typically correct in its expectations of
Federal Reserve interest rate actions; indeed, it is with this fact in mind
that many argue that the Fed merely follows the market with regard to setting
interest rate policy. Were there ever a time for the Fed to surprise the
market, however, that opportunity existed today - the Fed should have taken
advantage of a number of current economic conditions to hike by 50 basis
points at Tuesday's meeting.
I'm
well aware that mainstream economists had been hoping for the opposite - a
signal that the end to the Fed's tightening campaign was near, but I disagree
with that sentiment based on the following factors:
·
With
the recent rise in long-term rates (the Ten-year Treasury stands at 4.4%),
the yield curve had garnered enough of a spread to allow for a .5% hike in
the Fed Funds rate to 3.75%, a level it is all but certain to reach in six
weeks, anyway.
·
Only
two months ago, market watchers spoke with near certainty about a looming
inversion of the yield curve, perhaps at the 3.5% level, yet long-term
interest rates have recently backed up on renewed inflation fears. The recent
spikes in oil, gold and even in the improvement in wage rates would have
given the Fed plenty of cover to say after today's meeting, "we needed
to act aggressively to contain inflationary pressures." And although a
50 basis point hike would have been negatively received, initially, it soon
after may actually have been viewed as a huge vote of confidence in what the
Fed believes to be the underlying strength of the U.S. economy, a surprise to
a world that still suspects our debt-dependent economy is too fragile to risk
any sudden jolts. Unfortunately, today's action may do little to impact the
recent movement in the price of oil, in particular, thus any near-term
economic weakness may be attributed to the painful impact higher oil prices
are having rather than the "normal" impact one would expect from a
more aggressive Fed tightening campaign.
·
Why
an economic slowdown? The U.S. stock and bond markets are now overbought and
oversold, respectively. If reversals that would bring a simultaneous stock
market decline and bond market rally seem imminent, anyway, together these
would be taken as signs of a market that is worried again about looming
economic weakness, thus calling the sustainability of the Fed's tightening
bias into question and potentially leading it to halt its hikes sooner than
the 4%-range or above, which the market had recently come to expect. If the
market readjusts its Fed Funds expectations back down, that would be a huge
negative for the U.S. Dollar, whose rally has been largely supported by the
Fed's actions this year and which has started to act poorly of late... the
Greenback could have used a boost today.
·
Real
Estate: if a housing bubble exists, which it surely must in at least some
markets, then it can be rightly said that the primary cause has been the
sloppy lending that has been taking place in the mortgage lending arena. As
of yet, aggressive lending practices haven't receded noticeably, which means
it may actually make sense for the Fed to specifically attempt to flatten the
yield curve; with rates still near generational lows, removing the
profitability/attractiveness of risky lending by erasing the spread between
short and long-term rates will have a much bigger impact than hoping a move
from 4% to 4.5% in the benchmark ten-year Treasury will do the trick.
Acting
to more aggressively rais e the Fed Funds rate is not without risk since an
inverted yield curve (and recession) could still result. However, if I'm
reading things correctly and the market is poised in such a way that we'll
soon be worrying again about another "soft patch" or worse, anyway,
then the Fed missed an opportunity.
Short-term
rates are inching higher from what were such extremely low levels that the
Dollar is still in need of support and the Fed Funds rate will need to first
get even higher if the Federal Reserve wants to consider rate cuts as a
"cure" for the next recession, whenever it should arrive.
Therefore, when economic conditions as well as the long end of the yield
curve give the Fed room to be more aggressive in raising rates, it needs to
take advantage.
- end
of excerpt -
The
above release is now part of a full-length article, one that also contains
comments on gold and the Euro and is available at our website, www.deltaga.com.
Chip
Hanlon
President, Delta Global Advisors, Inc.
19051 Goldenwest,
#106-116 Huntington Beach, CA 92648 Phone: 800-485-1220
Fax: 800-485-1225 www.deltaga.com
A widely-followed
market commentator, Mr. Hanlon served as the C.O.O at Euro Pacific Capital
prior to taking the reigns at Delta Global. He had previously been the
President of Unfunds, Inc. and spent 7 years prior with Sutro & Company
as a Vice President and the company's Los Angeles Director of Syndicate
Offerings.
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