Generally we aren’t ones to criticize the Fed – post crisis they have done an excellent job supporting a recovery through zero rates and unconventional measures, and have begun to step back without causing the panic and damage that was predicted. It’s an incredibly difficult job, with huge importance.
That said, our view is that the Fed has pretty much hit the mandate, the data supports that, and an end to zero rates is warranted soon. The drop in Q1 GDP looks increasingly like a quirk. In reading the dueling Fed blogs as to the cause of this drop (New York FED says winter and San Francisco FED says residual seasonality), we can’t help but think that either way, Q1 is not a true reflection of the economy now or going forward. Do you think productivity fell 3% in the first quarter? Although the Fed has consistently been too optimistic with GDP projections, it has also been too pessimistic on jobs. Only one of these is in their mandate. Put simply, the economy doesn’t feel like it needs the same rates as the depths of the crisis, particularly at a time when expansionary policies are starting to take hold elsewhere.
Below we show a selection of charts – although you can pick a heap more to illustrate it.
Looking at the Fed Funds futures curve, the market has priced out the chances of a June hike. A July hike has largely been taken off the table as well, with the general consensus that the FED will not raise rates during a meeting with no press conference following (the June meeting has a press conference, the July meeting does not). We just don’t think that the intention in giving more transparency with press conferences was to cut the number of meetings – where policy changes could be made – down by half. It is though no small thing to raise rates for the first time in almost a decade. We think that using the June meeting (with press conference) to provide guidance to a possible July rate hike, or the announcement of a July press conference makes a lot of sense. We aren’t calling for rocketing rates, but as Stan Fischer says, “going from an ultra-expansionary monetary policy to an extremely expansionary monetary policy.”
The August Fed Funds contract, currently priced at 99.84, captures both these meetings.
(Most of the charts are self-explanatory – the last one seeks to assess the distance the economy is from the FOMC’s goals. It was presented by James Bullard in a presentation last year.)