Fed says U.S. economy strong enough to handle rate hike

[Zippyjuan]

http://www.reuters.com/article/2015/...0OX2DX20150617

The U.S. economy is growing moderately after a winter swoon and likely strong enough to support an interest rate increase by the end of the year, but concerns remain over the recovery of the labor market, U.S. Federal Reserve officials said on Wednesday.

With the economy still on track to grow as much as 2 percent for the year, the central bank's latest policy statement keeps it on track for at least one and perhaps a second rate increase later this year.

Fed Chair Janet Yellen, however, emphasized that the rate decision was still up in the air and rested squarely on further improvement in the labor market - renewing her focus on a longstanding concern.

In a press conference following the end of the Fed's two-day policy meeting, Yellen said she wanted "more decisive evidence" that labor markets were healing, and that wages would increase beyond their current "subdued pace."

Even as the Fed appeared to be approaching a decision to proceed with a rate hike as soon as September, "some cyclical weakness in the labor market remains," Yellen said, pointing to the low labor force participation rate and the high level of part-time employment.

Her comments are likely to focus even more attention on upcoming U.S. employment and wage reports, as markets look for signs that continued economic growth is translating into more jobs and higher wages.

After a weak start to the year, highlighted by a first-quarter economic contraction, policymakers said gross domestic product is poised to grow between 1.8 percent and 2.0 percent in 2015, down from a March forecast of between 2.3 percent and 2.7 percent.

The Fed also said the unemployment rate is expected to be slightly higher at the end of the year - at 5.2 percent to 5.3 percent - than previously forecast despite the continued improvement in labor markets. The unemployment rate last month was 5.5 percent.

Inflation remains low but is expected to gradually rise to its 2 percent target over the medium term, the Fed said.

More at link.

My thoughts? They won't announce anything at their meeting next month which means September at the earliest for a announcement of any rate hikes (assuming they do happen before the end of the year- things are better but not sure they are quite strong enough yet). I would then expect at least a couple months between the announcement and any actual increases- which puts us into the holiday season- November or December. If it does not happen then, then we are talking March or April (given that first quarters have been the slowest of the year for the last several in a row). And if they do, it won't be much - probably a quarter of one percent.

[dannno]

My thoughts?

Do you think the rates are currently set too high or too low, with, and without, the potential increase?

[roho76]

Here we go...

Is this how we get to September?

[Zippyjuan]

Do you think the rates are currently set too high or too low, with, and without, the potential increase?

Generally, rates are too low if the economy is starting to overheat (usually indicated by very low unemployment and high or rising price inflation. We obviously aren't there. Rates are too high if the economy is growing too slowly (or shrinking) because costs of borrowing is too high (reducing investment into things like more equipment at businesses to increase productivity). As a Central Bank you want to tap on the brakes a bit if things are showing signs of growing too quickly. Our economic car is moving somewhat faster than it was during the recession but it is not anywhere near any dangerous speeds where we need to try to slow it down a bit. I don't think that right now we need economic brakes applied. But the Fed will be watching many numbers over the next quarter or two to try to see how things are moving along. First quarter was basically zero growth.

[Cap]

Fed holds off on interest rate hike, downgrades economic forecast

Federal Reserve policymakers on Wednesday kept the central bank’s benchmark short-term interest rate near zero, opting against the first increase since 2006 after determining the economy still isn’t strong enough to handle it.

Fed officials sharply downgraded their economic forecast for this year. They projected the economy would grow between 1.8% and 2% this year, well below the range of 2.3% to 2.7% in its last forecast in March.

If they’re correct, annual growth would be the worst since 2011 and would be far from the breakout performance some economists had hoped for this year.

http://www.latimes.com/business/la-fi-federal-reserve-interest-rate-20150617-story.html

ETA: Seems to be some conflicting stuff going on here. I'm all confused.

[Ronin Truth]

U.S. economy says not strong enough to handle, when the Fed ends up *ucking around with it.

[Occam's Banana]

Generally, rates are too low if the economy is starting to overheat (usually indicated by very low unemployment and high or rising price inflation. We obviously aren't there. Rates are too high if the economy is growing too slowly (or shrinking) because costs of borrowing is too high (reducing investment into things like more equipment at businesses to increase productivity). As a Central Bank you want to tap on the brakes a bit if things are showing signs of growing too quickly. Our economic car is moving somewhat faster than it was during the recession but it is not anywhere near any dangerous speeds where we need to try to slow it down a bit. I don't think that right now we need economic brakes applied. But the Fed will be watching many numbers over the next quarter or two to try to see how things are moving along. First quarter was basically zero growth.

[Henry Rogue]

Frankenstein Economics.

[AuH20]

Even the Fed acknowledges that all the economic statistic peripherals are bunk. Thus, no minor rate hike.

[TheTexan]

Why hasnt the option of lowering interest rates been discussed? To perhaps -1.00%

[oyarde]

Why hasnt the option of lowering interest rates been discussed? To perhaps -1.00%

That is being tried elsewhere I think .

[oyarde]

I am thinking about .25 percent July 2016 . Which means I need to get my money out of the markets and retire before then.To be safe , should I retire the Tue after Memorial Day ?

[timosman]

Why hasnt the option of lowering interest rates been discussed? To perhaps -1.00%

Negative interest rates are fine. Zero does not have any special meaning. All we have to do is eliminate cash.
http://www.bis.org/review/r150512a.htm

[Barrex]

Says ready for rate hike... and then doesnt hikes the rates...

[Acala]

Says ready for rate hike... and then doesnt hikes the rates...

Head fake. They probably netted $50 million for their friends with that maneuver. It's good to be king of the currency.

[Zippyjuan]

I am thinking about .25 percent July 2016 . Which means I need to get my money out of the markets and retire before then.To be safe , should I retire the Tue after Memorial Day ?

They always announce moves ahead of time to let markets adjust. They won't be raised in July. They possibly could announce in July that rates will be raised in the future though at that meeting. There is no meeting in August.

[timosman]

Head fake. They probably netted $50 million for their friends with that maneuver. It's good to be king of the currency.

The rates will never go up until after the system collapse. They have painted themselves into a corner. All that talk about raising interest rates is just that.

[Zippyjuan]

They will never be able to end QE either. Even though they did.

[helmuth_hubener]

Generally, rates are too low if the economy is starting to overheat (usually indicated by very low unemployment and high or rising price inflation. We obviously aren't there. Rates are too high if the economy is growing too slowly (or shrinking) because costs of borrowing is too high (reducing investment into things like more equipment at businesses to increase productivity).

Here's Austrian Business Cycle Theory summed up in one sentence:

There's a delayed reaction, genius!

What the Fed does is drive around their multi-ton container ship with one foot on the gas and one on the brake. "Why isn't this thing going faster? Pour more coal on the fire! Man, it still is going really slow. More power! Amp it up to 11!" An hour later: "Ah, finally we're up to speed like I like. Things are good. Guys, turn down the boiler some." 15 minutes later: "Why are we still accelerating? Time to tap the brakes." 30 minutes later: "Brake! Brake, already! Why aren't we slowing down?" 30 minutes later: "Great, now we're going way too slow. Fire up the boiler again, men!" 15 minutes later: "Why isn't this working? We need more steam!"

And so back and forth and back it goes, "Pedal to the metal!" then "Stop, stop, stop!"

Solution: end the Fed. Market interest rate. Smooth sailing.

[timosman]

They will never be able to end QE either. Even though they did.

The Fed Has Not Stopped Trying to Stimulate the Economy
http://www.nytimes.com/2014/10/30/up...e-economy.html

[timosman]

Solution: end the Fed. Market interest rate. Smooth sailing.

Too late for that. I think they are going for the "minimize the impact" option.

[Chester Copperpot]

Generally, rates are too low if the economy is starting to overheat (usually indicated by very low unemployment and high or rising price inflation. We obviously aren't there. Rates are too high if the economy is growing too slowly (or shrinking) because costs of borrowing is too high (reducing investment into things like more equipment at businesses to increase productivity). As a Central Bank you want to tap on the brakes a bit if things are showing signs of growing too quickly. Our economic car is moving somewhat faster than it was during the recession but it is not anywhere near any dangerous speeds where we need to try to slow it down a bit. I don't think that right now we need economic brakes applied. But the Fed will be watching many numbers over the next quarter or two to try to see how things are moving along. First quarter was basically zero growth.

rates ARE ALWAYS TOO LOW. price inflation.. how about the fact that printing money prevents natural deflation from making savers richer.

wtf is wrong with everybody

[jclay2]

Generally, rates are too low if the economy is starting to overheat (usually indicated by very low unemployment and high or rising price inflation. We obviously aren't there. Rates are too high if the economy is growing too slowly (or shrinking) because costs of borrowing is too high (reducing investment into things like more equipment at businesses to increase productivity). As a Central Bank you want to tap on the brakes a bit if things are showing signs of growing too quickly. Our economic car is moving somewhat faster than it was during the recession but it is not anywhere near any dangerous speeds where we need to try to slow it down a bit. I don't think that right now we need economic brakes applied. But the Fed will be watching many numbers over the next quarter or two to try to see how things are moving along. First quarter was basically zero growth.

The modern econ crowd is hilarious. A bunch of phds in a gigantic circle jerk and all they can come up with is:

Economy bad - Rates Down
Economy good - Rates Up

The Phillips Curve can kiss my arse. Zippy, how do you know that your prescribed manipulation of interest rates is what will best optimize the economy? Do you think yourself a god? Are you able to forecast the implications on trillions of economic calculations and decisions? If you can fix the price of money why not try fixing the prices of commodities, labor, consumer goods? You are either disillusion or being knowingly deceitful. My guess is the latter. But of course, whats a paid troll to do....

[jclay2]

Too much credit. I would say its more like a failed rube goldberg machine where each step needs human assistance to get to the next point.

[John X]

Here's Austrian Business Cycle Theory summed up in one sentence:

There's a delayed reaction, genius!

That's at least what they're forced to say now ....Austrians in 2008 certainly weren't saying that 7+ years of decreasing unemployment and low inflation would occur alongside massive QE and 0% interest rates.

[Zippyjuan]

I believe they were saying something about another crash right around the corner along with hyperinflation. That stimulus won't help but just make things worse.

[Ronin Truth]

Ah, but is the Federal Government strong enough to handle a rate hike? Stay tuned!

[helmuth_hubener]

That's at least what they're forced to say now ....Austrians in 2008 certainly weren't saying that 7+ years of decreasing unemployment and low inflation would occur alongside massive QE and 0% interest rates.

No, the delayed reaction is a core element of the theory. Austrians have not been "forced" to somehow change their story, as you suggest. Way back in the 1920s the theory was the same, and Hayek and Mises were claiming that although the artificially low interest rates of the 1920s did not seem to be causing price inflation nor any other problem, it was causing higher inflation than otherwise -- a lack of price deflation in this case -- and that eventually, there would be inevitable repercussions. And that was true. And that is still just as true.

Austrian Economics is not a predictive empirical science. So while the Austrian economists as economists were not making that particular prediction in 2008, neither were they making any other. So, no bonus credit to them, but no deduction either. Making predictions simply isn't part of their discipline as they see it.

Now, individual investment advisors who see themselves as influenced by the ideas of the Austrian economists (but who are not themselves economists) certainly made various predictions and gave various investment advice. Such people include: Peter Schiff, Doug Casey, Gary North, Jim Rogers, Jim Puplava, and Chris Leithner. Like all investment advisors: to the extent they help their clients accomplish their goals by making them aware of tools, techniques, and products and making those things accessible, I believe they are useful. To the extent they put on their "guru" caps and forecast the market, I believe they are misguided, dangerous, and usually wrong.

One investment advisor who absorbed the true lessons of Austrian economics better than the ones listed above was Harry Browne. He had a different approach. He rejected guru-ism and instead recommended a systematically agnostic stance. His ideas have been performing exceedingly well for over 40 years.

Anyway, Austrian economics does not tell us what specifically is going to happen to the economy in the future. It doesn't say what will happen "this time." In fact, it explicitly rejects that thinking and tells us that this time will never be the same as last time, and that next time will be different yet again. Those pesky humans are so unpredictable. You never know just what they'll do. That's Austrian economics.

So I appreciate your thoughtful skepticism and indeed rejection of what you see as Austrian economics. And in fact, I share it. But what you -- and I -- are rejecting is not Austrian economics but rather the shallow reduction of it into simplistic soundbites and ineffective advice by hucksters and self-styled gurus.

[Madison320]

One investment advisor who absorbed the true lessons of Austrian economics better than the ones listed above was Harry Browne. He had a different approach. He rejected guru-ism and instead recommended a systematically agnostic stance. His ideas have been performing exceedingly well for over 40 years.

Do you get paid for promoting that?

Anyway, Austrian economics does not tell us what specifically is going to happen to the economy in the future. It doesn't say what will happen "this time." In fact, it explicitly rejects that thinking and tells us that this time will never be the same as last time, and that next time will be different yet again. Those pesky humans are so unpredictable. You never know just what they'll do. That's Austrian economics.

If that's true then I don't agree with Austrian economics. My belief is in basic supply and demand. A couple years ago me and my wife were watching the news and they reported that Venezuela was going to impose price controls on food. I said "Food shortages will be coming to Venezuela". Sure enough about 6 months later they had food shortages. Seemed like simple common sense to me. Basic supply and demand.

Most of the time I agree with you that it's hard to predict the future. But every now and then an event occurs that makes a prediction fairly obvious. Earthquakes are hard to predict but if the San Andreas fault starts moving apart by a foot a day, it's pretty likely you're going to get an earthquake. We've just had what is probably the largest government stimulus in the history of mankind. Common sense should tell you that a major "hangover" or "correction" or whatever you want to call it, is due. If we just had a small stimulus then I'd agree. The "hangover" might get covered up by other unforeseen events. But this stimulus is too big. Nothing is going to happen to cover up this coming hangover. Well maybe if we discover a way to generate power with nuclear fusion and it turns out it can only be done on US soil. That might do the trick. But short of a miracle, we're going to either get a massive downturn or more stimulus and a massive dollar crash.

I have question about Browne's investment strategy. The part about 25% cash and 25% bonds. Is that all in US dollars? Or do you diversify that with foreign cash and foreign bonds?

[Ronin Truth]

Gasoline made without petroleum?