Fed Surprised No One

Today, the Federal Reserve surprised nobody. They raised interest rates by 25 basis points; the 6th rate hike since the Fed began, in December of 2015.  The rate is now between 1.5% and 1.75%, so the midpoint of that is around 1.635. So we’re still significantly below 2%, but I guess we’re closer to 2% than 1% and obviously, we’re a lot higher than zero which is where rates stood during most of the Obama Administration.

The Fed Already Broke It

As I said in my last podcast, everybody was convinced the Fed was going to raise rates, which is probably the reason they did it. The Fed doesn’t want to upset the apple cart; the Fed does not want to concern anybody;  if anything seems to be going well,  “If it ain’t broke, don’t fix it.” Of course, the Fed already broke it although the Fed does not understand that.

Fed Looking All the Way out to 2020

In fact what the market was looking for was an indication of whether or not the Fed was going to hike 3 times this year, or would they hike 4 times. I still don’t think they know, although the consensus seems to be that as a result of today’s statement and press conference, we’re going to get 3 rate hikes this year, which means 2 more, not 3 more, but it’s still not a done deal. But the Fed seems to be even more optimistic ab0ut the economy going forward, so the Fed is predicting 3 more rate hikes in 2019 and then more rate hikes in 2020. So the Fed is looking all the way out to 2020, saying the economy is going to be great, and we’re going to keep on raising rates.

Fed’s Optimism Waxes as Economic Reality Wanes

In fact, the Fed seemed more optimistic about the U.S. economy then they were in the past, which, to me, is all politics. Powell is up there, trying to talk up the U.S. economy because that’s exactly what his boss, Donald Trump, wants him to say, so he is being a team player. One of the funnier parts of Powell’s prepared statement is that he said the outlook for growth has been improving in recent weeks. Recent weeks! How is he saying that the outlook for growth has been improving when it has done the opposite?

Q1 GDP Forecasts Collapse

Six weeks ago the Atlanta Fed’s Q1 GDP Estimate was at 5.4%. The are now down at 1.8%. Those are the same weeks where Powell says the economic outlook has been improving.  How is it improving when you have a collapse from expecting 5.4% to expecting 1.58%?  It’s not just the Atlanta Fed.  All the investment banks, everybody who forecasts GDP  growth has ratcheted down their foresasts significantly in the very weeks where Powell is now saying the economy is improved.