The Finance Gourmet

Personal Financial Advice from a former Certified Financial Planner

2019 Fed Meetings

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The U.S. Federal Reserve Board meets on a fairly established schedule. The actual dates of meetings are published in advance, both as a way to be transparent, and as a means to avoid looking panicked or interested in specific events. The idea is that if you already know the Fed is meeting on April 30th, for example, then when some huge meltdown occurs on April 27th, you know that the Fed meeting isn’t in response to that event, because it has long been scheduled.

As such, the Fed has released its tentative schedule for 2019.

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2019 Federal Reserve Board Meetings

The meetings, as usual, are over a two-day period of Tuesday to Wednesday. Any actions taken, such as raising or lowering interest rates, are typically voted on and announced on the Wednesday part of the meeting, so it’s sort of common to just think of the Fed as meeting on Wednesdays.

For 2019, the Fed meetings are:

  • January 29-30
  • March 19-20
  • April 30- May 1
  • June 18-19
  • July 30-31
  • September 17-18
  • October 29-30
  • December 10-11
  • January 28-29, 2020

As you can see, there are no Fed meetings in February, May, August, or November.

The Fed Chairman gives quarterly new conferences which are scheduled for after the March, June, September, and December meetings. He also testifies to Congress twice each year.

The markets love to overreach to interest rate moves, and parse Fed meeting notes in between each meeting for clues to what the Fed will do next. These days, those predictions are easy to make as the Fed telegraphs its moves, often months in advance, to avoid startling the markets.

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Most analysts still expect another two or three rates hikes in 2018, although the volatility of the Trump administration, bizarre economic policies, the effects of last-year’s tax bill, and an economic expansion that is getting very, very old, may complicate those additional hikes in coming months.

Is Inflation Real Finally?

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The Fed has been raising interest rates over the last few years based on fears of inflation that never seemed to come to pass. But, with monetary policy still very loose, and investors in a good mood pushing the stock market higher and higher (with a few days of correction last week), the rising rates seemed to have no real effect on the economy. Unfortunately, this is the way economic policy works. Nothing happens, until it does, and then you have to hope that you already got it right.

Inflation in January

The 12-month rate for wholesale inflation rose to 2.7% for January. That’s a pretty big number, and it’s the first one that actually suggests the Fed’s long feared inflation might actually be real.

Before the data came out, the markets (and the Federal Reserve’s dot plot) anticipated three rates hikes in 2018. The current rate is 1.5%, and assuming the Fed follows it’s recent history by raising rates a quarter-percent (0.25%) each time, that means that interest rates would end the year at 2.25%. That’s hardly high, historically speaking, but definately higher than anything this market has seen in a long time. Add-in the fact that the Fed is also unwinding its “off-book” monetary policy of buying bonds by letting maturing bonds roll off the books without being replaced, and you have a market that faces the first non-zero-ish monetary policy of the last decade.

But, before we get ahead of ourselves, it is important to remember that this is not yet a trend in inflation. Only the last two months have shown any actual inflationary pressure, and other than the stock market, there are few signs that the economy is thundering ahead. In fact, numerous companies have announced layoffs in the past couple of months, and while the job market remains tight, wages are not increasing, which is truly bizarre when you consider how many states are increasing their minimum wage.

Most analysts are eyeing the next jobs report. It comes out on March 8. If wages are indeed rising, and employment remains strong, then we may finally be experiencing the long expected inflation.

The irony is that this expansion, as weak as it has been, is getting long in the tooth. It might not take much to tip it back over into a recession of some size, and overly-aggressive Fed rate hikes might be just the thing to tip it.

 

December Rate Hike (Again)

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The Fed has now completely given up the pretense that it’s interest rate increases have anything to do with its 2% inflation target. Now, it is about tightening up the financial conditions, and in particular trying to put the breaks on the stock market.

As noted over at Market Watch

Reinhart said current policy is not dissimilar to the steady quarter-point rate hikes seen from 2004-2006. The only thing missing is the phrase “measured pace,” he said.

Beginning in the summer of 2004, the Fed raised its short-term rate target from 1.25% to 5.25% in 17 straight quarter-point moves. But the policy failed to trigger tighter financial conditions, Harris noted.

And, this is what should be terrifying. From 2004 to 2006, the Fed insisted on raising rates right into what would become the Great Recession. By raising rates when there is no inflation, the Fed becomes a really powerful group of market timers who have decided the stock market (this time, the real estate market last time) is “too high.”

interest rates federal reserve

Ironically, this all becomes a self-fulfilling prophecy. When the Fed’s interest rate hikes finally do get the attention of Wall Street, it comes in the form of a knife slashing a tire, not as a pin prick to a slightly over-inflated balloon.

The Fed currently projects three rate hikes in 2018 in addition to this December increase. That may change because the Fed is getting a new chairman and Yellen is on her way out. However, most analysts think the new chairman will continue the current Fed policy of slow and steady rate hikes untethered to inflation.

In addition, if the tax cut bill does get passed and signed, the Fed may feel the need to kick up rates higher, or faster.

Either way, look for another quarter-percent rate increase at December’s meeting, and cross your fingers that this one isn’t the “tire slash” rate hike.

 

November Looking Funky for Stock Market

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These last few weeks have dumped piles of external events onto the stock markets. As usual, the market overreacts to many of these and under-reacts to others. For long-term investors, this is just another reason to have a well diversified portfolio that you rebalance regularly.

Market Data and Other Stuff

Just because you aren’t going to panic sell (right?) or run out and buy fearing you are missing the start of another rally (right?), doesn’t mean that we can’t take a look at what is going on in the economy, markets, and politics that might affect our investments over the coming months.

First up? The Fed!

President Trump has announced his pick for the next Federal Reserve Chairman, and it’s a known quantity. Jerome Powell is already on the Federal Reserve Board and holds views that are considered mostly similar to those of current Fed Chair Janet Yellen. In fact, many analysts suggest that there is no real purpose in replacing Yellen with Powell other than for the President to put his stamp on the board.

stock market end of year economy

It all adds up to more of the same. A Federal Reserve focused on “normalizing” interest rates (raising them) despite the economy coming in well below anything approaching the Fed’s so-called 2% inflation target. Look for one more rate increase in 2017, or a January 2018 increase unless something goes kablooey between now and then.

Next? The Economy!

Jobless claims were up, but everyone is attributing that to the effect of the hurricanes. This analysis is borne out by the fact that continuing unemployment claims (people who were already on unemployment last period continuing to be on it this period) falling. Add it up and the job market is doing fine. Not on fire, but not shedding jobs either.

The Big Bad Wolf in our story, however is the Producer Price Index. Expected to come in with a 0.1% gain, the report showed the index rose 0.4% in October. Typically, big surprises like this get revised back the following month, but even a 0.3% increase is a pretty big deal. This finally is actual evidence that inflation may be building in the economy.

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So, the rub is that the latest increase the Fed made to interest rates is still working its way through the economy. The question is, would that increase be enough to slow inflation, or do we need another? The answer, whether it is right or wrong, according to the Fed is that we need another increase. With this report, there is no doubt we’ll get one, unless there is a kablooey.

How about Earnings?

Stocks have performed almost exactly like you would expect them too. Companies that have been troubled lately reported earnings that were troubling. Companies that people expected to be doing well, had good earnings. Maybe the only surprise was Wal-mart, who did even better than expected, after doing better than expected already earlier this year.

For doomsayers who worried about the company’s future in the wake of its decision to boost up the minimum wage it pays employees, it looks like Wal-mart has figured out how to make money anyway.

Finally… Politics!

Tax cuts are coming! Tax cuts are coming! Or maybe not. You never know with Washington. Wall Street loves a tax cut, and the Fed loves calling tax cuts inflationary, but the current tax cut bill in Washington doesn’t really cut taxes so much as move them around a bit.

It takes back certain itemized deductions, in order to give out a bigger standard deduction. If anything, this tax bill might make your taxes a tiny bit simpler if you are one of those taxpayers who it near the break-even point on itemizing versus taking the standard deduction.

Now What?

It’s end of year time! That means that all of this is about to become meaningless background noise. When it comes to the U.S. economy, nothing is more important than holiday shopping season. If analysts get worried about holiday spending, the markets are heading down. If they like what they see, they’ll get a boost.

Often no one can tell if things are good or bad until the companies tell us next year. That’s why you often see a Santa Claus rally in December when in the face of limited data, spending seems good enough.

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Watch out for a bumpy January though. A Fed rate hike, plus actual holiday data, plus a new year, might just set us up for a solid correction in early 2018. Whether it sticks around, or is a temporary blip will depend almost entirely on if the job market keeps on going.

Kablooey!

You never know what will happen that has nothing to do with balance sheets, interest rates and economic data that can send everything sideways.

Kablooey is when something blows up (usually metaphorically, but not always) that causes a shock to the markets. There seems to be a lot of potential kablooey out there ranging from increasingly bizarre politics only loosely tethered to reality, to North Korea, to Russia, to the Russia investigation, to environmental issues, to terrorism. If something goes kablooey all this analysis goes out the window and we start over.

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