Robert R. Johnson is president and CEO of the American College of Financial Services and co-author of the recent McGraw-Hill book, Invest With The Fed.
Farming, teaching, and garbage collecting are routinely considered among the most thankless jobs. Perhaps high on that list should also be serving as a member of the Federal Reserve Open Market Committee. Market commentators routinely criticize the Fed for both its actions and inactions with respect to interest rate policy. Politicians as diverse as Rand Paul, Bernie Sanders, and Donald Trump have all called for increased governmental oversight of the Fed.
No doubt, following this week’s Fed meeting, there will be numerous commentators suggesting that the Fed should have raised rates given the strong jobs report in June. Others will continue to argue the opposite, and contend that the Fed acted too hastily last December when it increased rates for the first time in nearly 10 years. It does seem that with respect to monetary policy—a topic the vast majority of Americans don’t understand—everyone has an opinion.
Under Fed Chair Janet Yellen, the central bank has made it clear that its actions are going to be informed by the data. Pure and simple, the Fed will not raise rates this week because the economic data simply doesn’t warrant an increase. While the payrolls number was unexpectedly strong in June, it was on the downside in May. Housing starts in June were much stronger than expected, increasing by 4.8%, but that number has historically been extremely volatile.
Now, critics can certainly point to structural problems in the U.S. economy—chief among them is income inequality. The Fed has a dual mandate: maximum employment and price stability. According to the U.S. Bureau of Labor Statistics, the unemployment rate is 4.9%, approaching full employment. The current annual inflation rate is around 1%, a full percentage point under the 2% target. Some economists are concerned that potential deflation is a greater problem than inflation right now.
But people need to pause and take a deep breath before evaluating where the U.S. is and how far the U.S. economy has come. The nation is in the midst of a highly polarizing presidential election cycle, one in which politicians on both sides are pointing to all of the social and economic problems that, of course, only they are uniquely qualified to solve. They make it seem like things have never been this bad in the U.S. Add to that the context of slower global growth overall and a backdrop of negative interest rates in many developed markets. When the Fed looks at U.S. data, it’s keenly aware of the impact other economies have on the U.S. outlook.
In fact, while the Fed has a dual mandate, its leadership certainly monitors both the domestic and global financial markets. In 2009, at the nadir of the financial crisis, the S&P 500 stood at 676, and even market observers other than permabear Marc Faber were suggesting we all might need to return to being hunter-gatherers. Since then, the market has hit all-time highs, advancing over 178% over that time period. I don’t believe there is a single investor—other than, of course, short sellers—who wouldn’t have signed up for that market performance.
Some commentators dismiss stock market performance and suggest that it’s not indicative of the underlying economy. A contention is that the advancing market has simply enriched the 1% and the broad populace has not benefited. However, with the transition from a defined benefit to a defined contribution pension world, imagine how much worse the retirement income crisis would be if the financial markets had not rebounded from 2008-2009.
Contrary to some other commentators, I don’t expect any movements on interest rates until December, as the Fed meeting calendar simply isn’t conducive to any actions prior to then. The data doesn’t support raising rates this week. The next two Fed meetings—late September and early November—are simply too close to the presidential election for any moves to take place. The Fed doesn’t want to be accused of playing politics, and a move in September or November could be interpreted as just that. The Fed will likely stay out of the contentious fray.
In the age of the 24/7 news cycle, many pundits overreact to the release of new information. Indeed, that’s how they get attention. Let’s be thankful the Yellen Fed doesn’t and takes a measured approach instead.