Yesterday’s Federal Reserve policy meeting triggered some volatile swings in markets, including a 118-point dive in the Dow Jones Industrial Average, which had been on a moonshot move to the upside since Election Day.
The reason for the reversal: Fed policymakers signaled a faster trajectory of interest rate hikes next year … but don’t bet on it!
The Fed’s interest rate projections couldn’t hit the broad-side of a barn this year. So why overreact to forward-looking guidance, which has been consistently off the mark.
OK, I’m willing to give some credit where credit is due.
According to Bloomberg, SOME of the Fed’s fearless forecasts have been good this year … except for the forecast that mattered most to investors … the path of interest rates.
Several times every year the Fed releases detailed estimates of where they see the economy headed, and the likely path of the short-term Fed funds rate.
One year ago, the Fed forecast 2016 GDP growth of 1.9%. While the final numbers aren’t in just yet, GDP growth is actually tracking at 1.6% year to date.
And the closer-to-real-time estimate of the Atlanta Fed’s GDP Now estimate is predicting 2.4% for the fourth-quarter of 2016.
Blend these numbers together and the Fed’s GDP forecast made in December 2015 is as close to a bull’s-eye as economic forecasting gets. Close enough for government work anyway.
At the end of 2015, the Fed also expected inflation to trend higher this year. It has, with core inflation up 2.1% year over year and accelerating over the past several months.
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| Yesterday, the Fed announced its one-and-only rate hike of 2016! |
But the one forecast the Fed got hopelessly wrong is ironically, the one they have the most control over, and investors count on the most: Interest rates.
One year ago in December 2015, when the Fed raised benchmark interest rates by a quarter-point – for the first time in nearly a decade – they also forecast four more interest rate hikes in 2016, according to their infamous dot-plot.
Now, as a rule of thumb, higher interest rates cause investors to discount the value of the profits and dividends stocks earn. So generally speaking, higher rates equal lower stock valuations.
It’s no surprise then why stocks suffered an adverse interest rate reaction, with the Dow plunging about 2,000 points after that December 2015 rate hike, until stocks bottomed in February.
But lo and behold … the Fed was dead wrong about rates.
Yesterday, the Fed raised rates again by a quarter-point … but it was the one-and-only rate hike of 2016!
What happened to the four rate hikes forecast by the Fed a year ago? Blame it on Brexit, or China’s currency devaluation, the election, you name it.
The Fed’s mandate is supposed to be all about promoting stable prices and full employment, here at home. But the reality is that anytime there is a perceived threat to economic stability anywhere in the world – the Fed chickens-out when it comes to interest rate policy.
Yesterday markets sold off because the Fed may hike rates more than expected in 2017. I’ll believe it when I see it. Here’s the reality: The Fed is just as likely to be one-and-done again next year, as they are to hike rates even more than expected. There is just no telling, so I’m not going to lose any sleep over it.
Ironically, the Fed was far too bold in their rate forecast a year ago. Perhaps the biggest risk in 2017 then is that the Fed now underestimates inflation, is behind the curve already, and forced to raise rates even more than expected in 2017.
Good investing,
Mike Burnick
Director of Research
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Mike Burnick, with 30 years of professional investment experience, is the Executive Director for The Edelson Institute, where he is the editor of Real Wealth Report, Gold Mining Millionaire, and E-Wave Trader. Mike has been a Registered Investment Adviser and portfolio manager responsible for the day-to-day operations of a mutual fund. He also served as Director of Research for Weiss Capital Management, where he assisted with trading and asset-allocation responsibilities for a $5 million ETF portfolio.
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Great comment.
The Federal Reserve is just a bunch of corrupt bankers. They don’t know what the heck they are doing. They are qoverning monetary policy “by the seat of their pants”.
They should be audited!! And, the supposed “gold” in Fort Knox should also be audited!!
What gives them the right to “govern by the seat of their pants” without any accountability?
Yes but, we should remember that Yellen is a Democrat and that she met with Obama shortly after the dot chart came out and the market tanked about a year ago, but well before the election. I am not reporting news here, but in my mind I hear the words “Not before the election” being mentioned during that meeting called by Obama. This would explain why the dots were erased before the election, and any raise in November would have made the political smell of the swamp putrid. But by December and for the next four years that smell drifts to Trump’s Watch and is no longer on the Democrats. So who can say how high interest rates will go next year!
Hi Mike
The explanation on figures concerning interest rates from the fed including some of their other statistics is pure flatulence. They have wrecked the retirement hopes and ambitions of millions of Americans and forced them into greater risks on other markets. When this falls in a heap, many retirees are going to be poorer for the mishandling of rates by these buffoons at the fed.
Agreed
I also see one rate hike down the year, the question is, if it is coming early in the mid year or at the end of the year
I think Yellen is in Obamas pocket so she will do whatever she can to cause trouble for Trump. She will raise rates as many times as she can to hopefully derail him. Between her, the liberal media and Hillarys henchman it’s going to be a rough ride for Trump.
Diane,
Historically, it almost always a rough ride when the Presidency is occupied by a Republican. You may have heard it before, but I will repeat: Since 1929, the stock market has done over 300 TIMES better during Democratic Presidencies than under Republicans.
Don’t believe it? Do the research as it is there, except maybe FAUX News or the RNC sites….
too bad your such a hater eagle495 your words make no sense your logic derived from the huffington post is corrupt maybe you should try another source and prove it all to us on paper.
Mike B excellent article as usual, their always concise and straight to the point, what you didn’t mention though in that the normal economic cycle of expansion and contraction, the working capital cycle goes through the 5 key stages of boom, recession, depression, recovery and growth. But what you really forget to say is that famous line in the 1987 Oliver Stone film Wall Street by Michael Douglas, is that its impossible to make money, simply the money flows from one business to the next business to the next business. That’s why the central bank comes up with the term quantitative easing. Cheap money no, the real problem is cheap junk bonds, that are bought to cover vast periods of time when god can bring the world to an end at any stage if he likes. A government bond should be for 5 years not 10 years. That’s far too long a space in time. 10 Years is a fifth of a human beings journey to old age.
Government planners are almost always wrong…they act after the fact. The old Soviet Union had 5 year plans that were disasters. If we did not have a Fed….our economy would have seen tremendous growth over the last 30 years. And their current policies are building up pressures in a bubble that will explode with historical magnitude.
There’s likely to be no rate hikes at all next year. The Fed can’t raise rates beyond 1/2% without shrinking its gigantic balance sheet, not without creating a lot of serious repo and money market problems.
When they start shrinking their balance sheet, then you’ll know normalization is here. (And I hear nothing about it.) Until then, rates are going to stay low for more years to come.
(Don’t believe the inflation numbers either. They’re distorted — again — by housing. Except in rents and certain services, deflation is already here.)
Fed is the problem. Contrary to their verbal lies, It is politicized. In 1994 and again in 2004, the Fed, Treasury, and Potus got together to hash out the inflating of money supply to bolster recession conditions. Instead of showing leadership in setting the tone for sound monetary policy, they play games with corrupt Wall st and politicians/bureaucrats (its a revolving door), bailout losers, print exorbitant fiat currency and increase debt to the taxpayers. It all IRRESPONSIBILITY. They are owned by intl banker cartel and their allegiance is not to the American People. Do we have enough men of integrity to END THE FED?