An Open Letter to The Federal Reserve on the September Rate Decision
We at The Bahnsen Group have been clear in our forecast that you will not raise rates at the coming meeting of the FOMC September 16 and 17. In fact, I recently went all-in on this forecast on CNBC. The purpose of this letter is to plead for you to make me wrong.
The arguments for why we do not believe you will raise are simple:
1) You stated you’re targeting a 2% inflation rate, and you certainly aren’t getting it yet.
2) A headline unemployment number of 5.1% looks well below the level needed to justify a rate increase, but the internals are uglier than 5.1% would suggest – anemic wage growth, and high under-employment as measured by part-time workers who want full-time work and people leaving the labor force.
3) Perhaps most significantly, we believe the Fed views part of their job as enabling asset price growth, and recent events in Europe (July) and then China (August) suggest that more global asset price instability lies ahead, leaving you feeling vulnerable about the impact of a rate increase at this time.
So we believe that for these three reasons you are unlikely to yet raise rates.
But our opinions about what will happen should not be confused with what we believe ought to happen. We would be remiss if we did not point out the obvious:
1) A 0% federal funds rate does not leave you a lot of room to move should a real need to ease materialize. You have to be off the zero-bound to stimulate, should stimulation become necessary. (Unless you were to consider, Dear Lord, a QE4; we can’t believe that would actually be in the cards.) Getting to a low rate that is off of 0% gives future wiggle room should it become necessary.
2) We think that had you normalized two or three years ago, and now saw commodity prices cratering as they have been, you would be considering cutting rates now – not raising them. The problem is that you didn’t begin normalization a couple of years ago, and therefore are backed into a corner. Wouldn’t doing the right thing now be better than being forced to by markets later? Is there ever a bad time to do the right thing? Commodity prices, yield spreads, and dollar strength may very well force an answer soon enough. Wouldn’t getting off the zero-bound free up your future flexibility?
We suspect you view the economy the same way we do: It is not strong enough to warrant a full-blown rate normalization, as evidenced by the stubbornness of long bond yields to move higher. However, we also suspect you agree that it is not weak enough to warrant 0%. I don’t imagine we are close to a rules-based Fed – the kind we really believe is right for our society where market-price-disciplines determine rate policy. That’s okay – we’ll save that letter for another day. In the meantime, if the Fed wants to stabilize asset markets (and there is plenty of discussion to be had as to whether or not the Fed should be thinking about such a thing), we would suggest that by keeping the markets painfully aware that some rate hike is coming eventually rather than just doing it, we are creating more market instability, not less.
For these reasons and others, we would suggest a September rate hike makes all the sense in the world. But for all the reasons listed earlier in the letter, we believe it is not going to happen. When it eventually does, and then the next one, and then the next one, we think investors will have wished it had.
Originally posted on HighTower.