Rory Robertson
Rory Robertson
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The thing driving service prices is wage growth, and after two years of sub-par economic growth, we've got wages decelerating. If the Fed doesn't get the economy growing at an above-trend pace in the next couple of years, deflation will arise.
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Unemployment at 6 percent means the Fed has just lost six full years of progress towards lower unemployment in just six quarters. With its preferred measure of core inflation at the lowest level since the 1960s, the Fed probably requires a run of monthly payroll gains of 150,000 to 200,000 before it will feel any real need to tighten.
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Financial conditions clearly are quite a bit tighter than they were six weeks ago. I'd be dumbfounded if the Fed was not anxious about this dramatic rebound in yields dampening the rebound in the pipeline.
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There's a perception that the economy is actually doing quite well, in particular the labor market. It's a fairly straightforward assumption the Fed would want to hike rates in March and perhaps in May. You might see bond yields go higher.
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I think it's going to be 50 basis points because the Fed is worried about the economy, and I think the accompanying statement will reflect that.
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The Fed is trying to do what it can, but the history of the past 200 years is that big booms tend to end badly -- big equity market booms in particular. The Fed so far has done a magnificent job of holding the show together, but we don't know what effects of the bubble are still in the pipeline.
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The Fed ultimately will be forced to cut rates further because we have had this ongoing issue of sub-par growth, disappointment on the jobs front and core inflation edging lower. People are talking about a terrific snap-back in the economy after the war, but I'm skeptical we're likely to see it.
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I'm not sure how markets might react. On one hand, you could see the shorts kicking in, pushing it higher, but on the other hand, you could see investors feeling a bit nervous because the Fed is saying things are worse than they thought.
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The inflation risk is less intense than many would imagine and, as energy prices edge lower, some investors are seeing value at current yields. It helps reduce the pressure the Fed has been worried about.
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The markets were a little disappointed that the Fed didn't give any explicit hint that a pause is around the corner.
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The longer the Fed drags this out without cutting rates, the more they're admitting they don't have much firepower at all. They're sitting on their hands, hoping for the best.
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The sharp rise in mortgage rates that is now under way threatens to limit the refinancing boom, limiting the cash that will be dropped into U.S. consumers' hands during the critical holiday-shopping season.
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The thing that helped the economy so much was a drop in interest rates, which meant lower mortgage rates, which meant consumers have been able to tap the wealth in their homes by refinancing and taking equity out of their homes. With rates having backed up so sharply, refinancing is not such a bargain any more.
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This number doesn't tell us much at all -- the seasonal factors are all over the shop. It only means something if it's maintained over the next several weeks.