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Fed Minutes Cause Economists to Scratch Their Heads
There were a couple of notable comments from the FOMC’s August 8th minutes that were released yesterday that are leaving many economists scratching their heads and wondering if the Fed’s economic staffers need a refresher course on Economics 101.
After reading the minutes a good half dozen times, I came across the following statement and had to keep going back to it because I thought it may have been a mistake: …housing, energy, policy lags and reduced wealth effects are going to “hold economic growth below potential over the next six quarters.”
The next six quarters will take us into 2008! If that’s the case, then why all the hints and whispers about inflation concerns and another rate hike? It doesn’t add up and, frankly, is quite inconsistent from what I expect from our Fed Governors, and more specifically, Chairman Bernanke.
9 to 1 Signals an End to the Rate Cycle
Let’s get down to business: The Fed is finished with the rate cycle and any mention of a potential hike in rates is pure baloney.
It seems that I’m not alone with this assessment; even the Committee is looking to be in agreement. We were first told that the initial vote to pause rates was “a close one,” but as it turned out the vote was 9 to 1 (Lacker was the only hold-out).
If there are any inflationary concerns for the U.S. economy, they can be attributed to the higher energy prices and after reviewing the current Gross Domestic Product figures, we can be reassured that 1) the Fed has done its job, and 2) the economy has landed and it’s landed softly.
Remember, if you decide to review the Fed’s minutes, closely analyze the actual language used. You’ll read about inflation “risks”, and that’s exactly what they are—just risks, not the “base case”.
History tells us that if the Fed pauses for at least four months, the probability of the next policy change being a rate cut is 100%. The period between a tightening cycle and an easing cycle is, on average, eight months.
Now, further evidence to solidify this argument that the Fed is done: Going back the last 35 years, the FOMC has never had a rate hike when the U.S. GDP figure was less than 3%, and the Q2 print came in at 2.5%.
In other words, the U.S. economy would have to skyrocket within the next couple of months to push our GDP figure higher, and therefore warrant any tightening by the Fed. And, it’s not going to happen.
Remember These Dates
The two dates to circle on your calendar are March 20/21 and May 9. That is when we’ll see a new rate cycle begin—a Bernanke only rate cycle. Look for the Fed to begin cutting rates at one—or maybe both—of these meetings.
Thank you, Chairman Greenspan. Your final rate cycle is in the books. You can now go and relax and enjoy your retirement.
Until tomorrow,
Todd M. Schoenberger, Editor
Diligent Investor
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