4 Main Reasons why the FOMC Statement will NOT Decide to Raise Rates

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All eyes are on the U.S. Dollar on Wednesday as the Federal Open Market Committee (FOMC) will be releasing both its commentary on the U.S. economic outlook as well as the FOMC votes among its members.

The recent U.S. data has undoubtedly been upbeat. Let us make a review of the data from earlier this month (January 2015):

  • The NFP figures were higher than expected (252k versus 241k);
  • The unemployment rate fell 2 tenths of a percent (from 5.8% to 5.6%);
  • Tuesday’s consumer confidence broke the 100 level for the first time since 2007 (!);
  • Tuesday’s home sales were upbeat too (481k versus 452k).

The more worrisome news derived this month from the retail sector:

  • Core retail sales (-1% versus +0.1%);
  • Retail sales (-0.9% versus +0.2%);
  • CPI (-0.4% versus -0.3%)
  • Building permits (1.03M versus 1.06m).

REMAINS A MIXED BAG

This mixed bag of data has been a regular occurrence with the U.S. recovery over the last few years: there are arguments supporting a recovery but also data points showing a slow turn around.

First of all, it must also be noted that the US recovery certainly has lead to a massive US Dollar strength (see chart).

27- 1- 2015 gu eco

Another good performer has been US stocks. The market however might have reached oversold levels as the rising total market cap reaches 122% of the US GDP. This actually exceeds levels seen during the financial crises of 2007-2009, and only is beaten by the dot.com bubble back in the year 2000 (150%).

However, considering the fact that the interest rates have been at near zero levels for 6+ years and there have been 3 rounds of Quantitative Easing (QE), this particular recovery certainly has not been as speedy as other post recessions comebacks in the past 25 years.

Despite the ups and downs of the U.S. recovery, the U.S. revival still has a lot more muscle to it than the Euro zone and other parts of the world. The contrast is striking:

  • Whereas the US completed it QE3 program in September 2014, the Euro zone is implementing a new QE some 6-7 years after the financial crises highpoint;
  • The Bank of Canada decided to decrease its interest rates by a quarter from 1.0% to 0.75%;
  • The Bank of England board members who were in favor of an interest rate hike from 0.5% to 0.75% changed their minds and voted for maintaining 0.5%.

US RATE HIKES?

Will the FOMC decide to increase the interest rate for the first time since June 2006? The FOMC will probably have a couple major concerns when compiling arguments in favor of the rate hike:

  • QE 3 just completed a few months ago and the effect of its removal still needs to be monitored;
  • The Euro zone is expanding its QE program for the next 1.5 years. Does the US really want to raise rates when the Euro zone is keeping rates at 0% and adopting more QE at the same time?;
  • How much trust does the FED place on the slower growth of the US economy? The US economy is making progression but an increase in the rates too early could ruin the fragile recovery. The Federal Reserve System (FED) must avoid the mistake the European Central Bank (ECB) made back in April and July 2011 when it raised the rate prematurely from 1.0% to 1.5% only to bring them back to 1.0% by the end of 2011;
  • The global recovery is lacking a lot of luster not only in Europe, but in Canada (rate cut), China (debt), India (bureaucracy), Australia (slowing down commodities), Russia (bond status lowered to junk), etc.

CONCLUSION

I am not expecting a deviation from the FED’s direction. I think they will keep the status quo, which means no rate hikes anytime soon – even during the entire year of 2015. Considering the move of the ECB to implement more QE, other mixed recovery signals in the US, and considerable global recovery issues, I believe the FED will avoid acting too soon on any rate hike decision.

What are your thoughts?

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