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Does a Slow US Economy Mean Rate Hikes?

Posted by Joseph Trevisani on Apr 29, 2015 6:06:00 PM

The Federal Reserve governors acknowledged the weak first quarter economic growth and the disappointing March payrolls in today’s FOMC policy statement while saying they remain confident that growth will strengthen later in the year.

Janet Yellen and company have made it clear they want to raise rates this year for the first time since 2006, but they also want a stronger economy and the data is not cooperating. 

The Fed statement leaves the FOMC rate decision dependent on incoming information in the six weeks until the June 17-18 meeting. The prognosis is not promising.

Recent economic information including March retail sales, industrial production, capacity utilization, housing starts, durable goods orders, and business investment give no indications that the economy is about to accelerate now that winter is over. Consumer and manufacturing sentiment has dipped and looming problems in Europe, Japan and China cannot benefit the United States.

Even if the economy turned in a stellar performance in April it is more than likely that the Fed would wait for confirmation in May before acting and that will take the FOMC beyond the June meeting. An early summer rate hike would seem to be out of the picture. 

Market reaction to the FOMC statement was muted, the dimming U.S. economic picture is not news and the odds of a June rate hike have been diminishing for many weeks.

The Dow closed off 75 points at 18,035 but only 10 of those points came after the 2:00 pm Fed release.  The euro gained more than a figure against the dollar to 1.1120 having opened at 1.0981, but none of the rise was due to the Fed statement either. In fact the European currency closed about 30 points below its trading level just before the release.

The yield on the generic 10-year Treasury gained four basis points to 2.04 percent, but that is almost identical to the 2.05 percent average of the past six months. The 2-year yield was unchanged at 0.56 percent, within one point of its six month average of 0.57 percent.  

Whether the Fed raises rates in June or September, or not until 2016, the credit markets are convinced that low rates are here for many more quarters.

With the dismal U.S. expansion in the first quarter that already carrying into the second the Fed governors must be increasingly uneasy that their window for getting monetary policy off of the zero bound may be closing.

Joseph Trevisani

Chief Market Strategist

WorldWideMarkets Online Trading

Charts: Bloomberg

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