I’m not exactly going out on a limb here with a wild bet, but I’m going to go ahead and call it that the Fed won’t be raising interest rates this week.
Leave aside global unrest, the ongoing uncertainty of the migration crisis in Europe, and the widely predicted GDP slowdown in the third quarter — the housing outlook is pretty weak right now, and it had been one of the few silver linings in this anemic economy.
Meaning there won’t be much will to push interest rates up or, depending on your perspective, out of the negative rate they’re at now.
Jonathan Smoke, chief economist for realtor.com and one of the more optimistic-leaning realists in the trade, isn’t exactly at my level of pessimism, but even he concedes things are slowing.
“The new home sales report covering September released today shows a rate well below the consensus estimate and indicates that real issues emerged late this summer in the new homes market, questioning the supposedly strong growth signals that were previously interpreted by many,” Smoke says. “Last year we picked up momentum in the late summer and fall. This year seems to be the opposite—we are losing momentum.”
“That decline was likely a result of the stock market declines in August and September,” he says. “If builders are not focusing on first-time buyers, they are focusing on the segments most likely to be disrupted by declines in stock portfolios and retirement plans.”
That’s got to weigh on the Federal Open Markets Committee when it meets this week. This meeting does not include a press conference or updated economic projections, so it should be interesting to see how they spin all this.
Either way, I’m hardly alone in doubting there will be action.
“Our view remains that there is not sufficient support for a rate increase at this meeting,” says Isaac Boltansky at Compass Point Research & Trade.
Lindsey Piegza, chief economist at Stifel Fixed Income, concurs.
“Ahead of this week's Fed meeting, the housing market appears to be the sole silver lining in the recovery. After all, manufacturing has been hard hit along with trade as a result of sluggish international demand and a rising US dollar,” she says. “The labor market remains sluggish amid rising global uncertainty, and consumers, as well as service activity, have lost significant momentum without income growth and a decreased willingness to finance today's spending with tomorrow's income opportunities that may never materialize. And we can't forget nonexistent inflation.
“Thus, housing was really the one sticking point for Fed officials to say things aren't all that bad in the domestic economy. Of course with the latest round of housing data showing a pullback in activity, the Fed's pool of available data supporting a more optimistic view of economic conditions is rapidly shrinking, as is their window of opportunity to begin to back away from a 2015 timeline,” Piegza says. “In our opinion, at this point, the Fed ought to admit the economy failed to improve as expected, rendering the expectation – not a commitment – for a policy change by year-end unlikely.”
So with a marked slowdown in several key indicators, not to mention nonexistent inflation, Fed officials appear increasingly less confident in their ability to raise rates by the end of the year.
I may be alone in this, but it seems like it’s past time to rip off the Band-Aid and turn off the artificial respirator. The patient can’t stay on these machines forever and get better. There’s never going to be a perfect time.
If things get worse — and come on, Murphy’s Law — the Fed has nothing left in their toolbox.
Despite my prediction of what they won’t do, I’m still with the Motivation God on this one that they should ...