Fed rate hike

Federal Reserve Rate Hike #2


The Federal Reserve will likely raise short-term interest rates this week, when it convenes the last policy meeting of 2016. The second rate hike of the cycle comes one full year after the first, nine years after the last time it had previously raised rates. The central bank is probably more confident about this action than it was a year ago, because it will occur after the President-elect indicated that there would likely be a new boost to the economy, in the form infrastructure spending, tax cuts and deregulation. While GDP averaged a fairly subdued 2 to 2.25 percent during the recovery thus far, the potential Trump actions have prompted economists to increase their estimates for 2017 to 2.5 to 3 percent. Economists and investors will be paying close attention to any mention of how the FOMC may change its outlook in response to the major fiscal stimulus that will likely be enacted. A faster growing economy could mean that the Federal Reserve will finally see its much-desired pick up prices and as a result, the central bank should be gearing up for a series of rate hikes in 2017.

Here’s the rub: for all of candidate Trump’s complaining about Janet Yellen’s Fed keeping rates too low for too long, the biggest risk to the current expansion would be if the Fed were to move more quickly than anticipated, putting the current stock market rally at risk and potentially sparking a recession.

Fear not…current Fed officials appear to on track to under-deliver on their inflation target, as they have done consistently over the past twenty years. That’s why Yellen has been so willing to be patient on raising rates. Although Trump took aim at Yellen for not raising rates faster, she may in fact be the ideal Fed Chair to keep the economic expansion/stock market rally alive in 2017.


Savings: Any increase in the Fed Funds rate could help nudge up rates on savings accounts, but after the first increase, banks passed very little of the increase on to their customers. Bottom line: savers’ suffering is not likely to end any time soon.

Mortgages: While rates for fixed rate mortgages key off the 10-year government bond, not short term rates that the Fed controls, yields have already started to rise since the election. The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) increased to 4.27 percent, the highest level since October 2014 and up from 3.5 percent before the election. Adjustable rate mortgages (ARMs) are linked to shorter-term rates, which means that consumers should be careful about assuming these loans and also should consider locking in a fixed rate now. Those who have ARMs could see payment increases down the road.

Auto Loans: For those planning on purchasing a new car with a loan, don’t worry too much. An extra quarter-point increase on a $25,000 loan amounts to a few dollars a month in higher payments.

Credit Cards: Most credit cards have variable rates and unlike the savers, the card companies are quick to pass along the increase to the borrowers within a few billing cycles. You may want to consider locking in a zero balance transfer offer, because it won’t be around as the Fed keeps increasing rates in 2017.

Student Loans: Federal loans are fixed, so there will be no impact from a rate increase, but some private loans are variable. Double check your paperwork to determine what benchmark rate (Libor, prime, T-bill) your loan is tied to.


Stocks: If the Fed goes slowly and the economy improves, the stock market should be fine. But, as noted above, if the central bank ends up raising rates faster than expected, it could hurt prices. In the past, shares of banks, energy, industrials and technology do well amid rising rates.

Bonds: When interest rates rise, bond prices fall and in this particular cycle, it could be even more painful, because the slow growth recovery lulled many bond investors into complacency. That said, there is no reason to abandon the asset class. For most investors who own individual bonds, they will hold on until the bonds mature and then purchase new issues at cheaper prices/higher rates. For those who own bond mutual funds, they will reinvest dividends at lower prices and as the bonds in the portfolio mature, the managers will reinvest in new, cheaper issues with higher interest rates. In other words, being a long term investor should help you weather rising interest rates, though you may want to consider lowering your duration, using corporate bonds and keeping extra cash on hand. (For more on bonds, check out this post.)

MARKETS: There were new records all around, providing more post-election gains. Since November 8th, the Dow is up 8 percent, the S&P 500 has gained 11 percent and the NASDAQ is up 9 percent.

  • DJIA: 19,756, up 3.1% on week, up 13.4% YTD (23rd record close of 2016)
  • S&P 500: 2259, up 3% on week, up 10.6% YTD
  • NASDAQ: 5444, up 3.6% on week, up 8.7% YTD
  • Russell 2000: 1388, up 5.6% on week, up 22.2% YTD
  • 10-Year Treasury yield: 2.47% (from 2.39% week ago)
  • January Crude: $51.48
  • February Gold: $1,161.40, 5th straight weekly decline
  • AAA Nat'l avg. for gallon of reg. gas: $2.20 (from $2.17 wk ago, $2.01 a year ago)


Mon 12/12:

Tues 12/13:

6:00 Small Business Optimism

Weds 12/14:

8:30 Retail Sales

8:30 PPI

9:15 Industrial Production

2:00 FOMC Meeting Announcement/Economic Forecasts

2:30 PM: Fed Chair Janet Yellen press conference

Thurs 12/15

8:30 CPI

8:30 Empire State manufacturing survey

8:30 Philly Fed manufacturing survey

10:00 NAHB homebuilder survey

Friday 12/6

8:30 Housing Starts

Is the US Economy at Full Employment?


It may not feel like it, but the US economy is at full employment. The Labor Department reported that the economy created 178,000 jobs in November, just under the 2016 average monthly creation of 180,000; and the unemployment rate fell to a nine-year low (August 2007) of 4.6 percent. According to the Federal Reserve, there is no magic unemployment rate that defines “full employment,” because that notion is largely determined by uncertain and “nonmonetary factors that affect the structure and dynamics of the job market,” which “may change over time and may not be directly measurable.” Still, in the Fed’s September 2016 Summary of Economic Projections, participants’ estimates of the longer-run normal rate of unemployment ranged from 4.5 to 5 percent and had a median value of 4.8 percent.

The 4.6 percent November print might make you think that we are indeed at full employment, but why the rate fell is also important. The slide occurred not just because of new workers finding jobs, there were also 226,000 people dropping out of the labor force. That amount surprised economists, who mostly told me, “let’s see what the coming months bring, before we come up with a reason behind the change.”

Meanwhile, the broader measure of unemployment (U-6), which includes part-timers who can’t find full-time work and discouraged jobseekers, who have given up looking for work, fell to 9.3 percent, a rate not seen since April 2008. The broad rate averaged 8.3 percent in the two years before the recession.

Besides the surprising decrease in the labor force, the other disappointment in November was the tenth of a percent slide in average hourly earnings, after a sharp rise in the prior month. Still, earnings were up at a 2.5 percent annual rate (compared with 2.8 percent in October), a decent clip with inflation remaining low.

This was the last important piece of data before the Fed’s last policy meeting of the year. While it was not sterling, it was certainly good enough to justify increasing rates by a quarter of a percent. Whether or not the central bankers will explicitly change their notion of full employment remains to be seen.

MARKETS: Investors took a breather from the post-election stock rally. Crude oil shot up over 12 percent on the week, after OPEC agreed to cut production in 2017.

  • DJIA: 19,170, up 0.1% on week, up 10% YTD
  • S&P 500: 2191, down 1% on week, up 7.2% YTD
  • NASDAQ: 5255, down 2.7% on week, up 5% YTD
  • Russell 2000: 1347, down 2.5% on week, up 15.7% YTD
  • 10-Year Treasury yield: 2.39% (from 2.36% week ago, yields hit a 17-month high of 2.44% on Thurs)
  • January Crude: $51.68, up 12.2% on week, largest gain since Jan 2009
  • February Gold: $1,177.80, down 0.3%
  • AAA Nat'l avg. for gallon of reg. gas: $2.17 (from $2.12 wk ago, $2.05 a year ago)


Sun 12/4: Italian Referendum: Voters will determine whether or not to change some aspects of the Italian constitution. (For more, see analysis by E.P. LiCursi at the New Yorker.) A no vote could unseat the current Prime Minister Matteo Renzi and potentially impact the weak Italian banking system and even Italy’s membership in the EU, often referred to as “Quitaly”.

Mon 12/5:

10:00 ISM Non-Manufacturing

Tues 12/6:

8:30 Q3 Revised Productivity and Costs

8:30 International Trade

Weds 12/7:

10:00 Job Openings and Labor Turnover Survey

3:00 Consumer Credit

Thurs 12/8

Friday 12/9

10:00 University of Michigan Consumer Sentiment

Solid Jobs Report = Fed Rate Hike


The government said that the U.S. economy added 211,000 jobs in November, which was the high-end of the predicted range of 160,000-220,000. There is now little doubt that the Federal Reserve will raise short-term interest rates when it meets in a week and a half. The three-month average of job creation stands at a solid 218,000 and year-over-year, 2.64 million jobs were added. Although 2015 average monthly job creation of 210,000 is less than last year’s strong pace of 260,000, it has certainly been strong enough to push down the unemployment rate from 5.8 percent a year ago, to a seven-year low of 5 percent. The broader measure of unemployment, which includes those who have stopped looking as well as those working part-time for economic reasons, edged up slightly to 9.9 percent, though remained under the key 10 percent level for a second consecutive month.

The Fed is also likely to be encouraged by the breadth of job gains, including the domestic-focused construction, retail and health care sectors. That said, two areas that continue to be under pressure are mining and manufacturing, both of which have been struggling under the triple whammy of lower oil prices, weak demand overseas and a stronger U.S. dollar. Another area of weakness is the still low level of working-age Americans who have jobs or are actively looking for work. The participation rate edged up to 62.5 percent, due to a 273,000 increase in the labor force, but because of demographics and the large number of would-be workers giving up their job searches, participation remains near 40-year lows.

Back to the good news...after a swift 2.5 percent annual increase in October, wages in November were up a still-respectable 2.3 percent from a year ago. In a separate report released by the government earlier last week, Q3 hourly compensation jumped by 4 percent in the third quarter, on an annualized basis and was up 3.6 percent compared to the same quarter a year ago. If that trend holds, hourly compensation is on track to rise by the largest amount since 2007 and when adjusted for inflation, the increase would be the fastest since 2000.

Overall, the results confirm that the economy continues to expand; the labor market is improving and workers are gaining leverage; and the Fed will soon hike interest rates for the first time in over nine years.

MARKETS: The US jobs report, along with promises of “no limit” on additional ECB stimulus measures, was enough to save what was shaping up to be a losing week.

  • DJIA: 17,847 up 0.3% on week, up 0.1% YTD
  • S&P 500: 2,091 up 0.01% on week, up 1.6% YTD
  • NASDAQ: 5,142 up 0.3% on week, up 8.6% YTD
  • Russell 2000: 1183, down 1.6% on week, down 1.8% YTD
  • 10-Year Treasury yield: 2.28% (from 2.22% a week ago)
  • Jan Crude: $39.97, down 4.2% on week
  • Feb Gold: $1,084.10, up 2.6% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.05 (from $2.09 wk ago, $2.79 a year ago)

THE WEEK AHEAD: December 9th marks the 50th anniversary of the debut of “A Charlie Brown Christmas”. The image of the sad little Christmas tree that Charlie and Linus selected may be a good symbol of the U.S. economy. At first glance, it seems a little thin and wobbly, but upon further reflection, it’s not “such a bad little tree. It's not bad at all, really. Maybe it just needs a little love.”

Mon 12/7:

Tues 12/8:

6:00 NFIB Small Business Optimism

10:00 Job Openings and Labor Turnover (JOLTS)

Weds 12/9:

Thursday 12/10:

8:30 Import/Export Prices

Friday 12/11:

8:30 Retail Sales

8:30 PPI

10:00 Business Inventories

10:00 Consumer Sentiment

2015 Economic Crystal Ball


No rest for the weary or hung over…time to dust off the crystal ball to see what lies ahead! Global Economy: After increasing at an estimated 2.4 percent rate in 2014, economists expect that U.S. GDP will pick up to 3 percent this year, which would be the strongest growth in a decade. Since 2000, the fastest real GDP growth was 3.8 percent in 2004, and the fastest growth for the recovery was 2.5 percent in 2010. The dot-com meltdown, plus the financial crisis has taken a toll on the U.S. economy since 2000, with an annualized pace of 1.9 percent, well below the post World War II average of 3.3 percent.

The drivers of growth include: consumers, who after paying down lots of debt, should see wage gains and will continue to enjoy the benefits of low energy prices; state and local governments, which have stopped slashing budgets and may spend a bit more freely; and the housing market, which after taking a breather in 2014, should contribute more to the economy in 2015.

Outside the U.S., the picture is more complicated. China’s double-digit growth rates are a thing of the past, as the world’s second largest economy attempts to impose controls that will likely keep GDP at six to 7 percent in the year ahead. Japan and Europe are still battling low prices, which is why central banks in both areas are likely to crank up efforts to defend against inflation. Emerging markets will continue to diverge, with countries that have not addressed economic imbalances, like Russian, Brazil and Venezuela struggling, while more balanced economies, like India, Thailand and Chile should be better positioned for growth.

2015 Year of the Raise: If 2014 was the year of the job (probably the best year for job creation since 1999), economists are hopeful that 2015 will be the year of the raise. Wage growth has remained stubbornly at 2 percent during the recovery, but this year, the improving economy and labor market should help wage growth finally start to outpace the rate of inflation.

Federal Reserve Rate Hikes: With bond buying over, the big question for 2015 is: “When will the Fed FINALLY increase short-term interest rates?” Reading between the lines of central bank speeches, statements and press conferences, most believe the first rate hike will occur in the third quarter of the year. Goldman Sachs analysts’ noted that once the Fed starts the process, it could move faster than the market now expects.

Oil: At her last press conference of the year, Janet Yellen called low oil a “transitory” phenomenon, which loosely translated means “Don’t get too used to those cheap gas prices!” The reason is that supply and demand will surely change. If the global economy picks up, so too will demand for oil, but these changes often occur slowly, which is why some economists are predicting that oil prices will likely remain in a range of $50 to $75 a barrel in 2015.


  • DJIA: 17,823.07, up 7.5% (6th annual gain, longest streak since 1990s)
  • S&P 500: 2058.90, up 11.4% (up an average of 20.7% a year for the last 3 years including dividends, its best three-year returns since the late 1990s)
  • NASDAQ: 4736.05, up 13.4%
  • Russell 2000: 1204.70, up 3.53%
  • Stoxx Europe 600: 342.54, up 4.35%
  • Argentina Merval: 8579.02, up 59.14%
  • Shangahi A Shares (Mainland China): 3389.40, up 53.06%
  • RTS Russia: 790.71, down 45.19%
  • 10-Year Treasury yield: 2.173% (from 3.03% a year ago)
  • February Crude Oil: $53.27, down 46% (lowest level since May, 2008)
  • February Gold: $1,184.10, down 1.5%
  • WSJ Dollar index: 83.04, up 12% (highest level since Sep 2003)
  • AAA Nat'l average price for gallon of regular Gas: $2.24 (from $3.32 a year ago)


Mon 1/5:

Automobile Sales

Tues 1/6:

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

Weds 1/7:

8:15 ADP Employment Report

8:30 International Trade

2:00 FOMC Minutes

Thurs 1/8:

8:30 Weekly Jobless Claims

3:00 Consumer Credit

Fri 1/9:

8:30 December Jobs Report

10:00 Wholesale Trade