The Fed’s Six Degrees of Separation


The week ahead is brought to you by the number SIX. The Northeast, home to 20 percent of the U.S. population, suffered its coldest winter on record this year, with an average temperature coming in at six degrees below normal. The unusually cold winter has been the main culprit in explaining why the economy expanded at an expected 1 percent or so in the first quarter (seasonally adjusted annual rate), with some forecasts as low as 0.1 percent! The first estimate of Q1 GDP will be released on Wednesday and there’s no doubt that cold weather negatively impacted both consumer spending and employment, which will drag down overall results. Hours after the government releases the GDP, the Fed will weigh in on the state of the economy and how it plans to manage monetary policy accordingly. Since Chairman Yellen’s testimony before Congress two months ago, there is mounting evidence that the pace of growth slowed dramatically, which may delay the Fed’s much-anticipated interest rate hike (the first increase in eight years). Because there is no press conference or forecast update for this FOMC meeting, any hints about the timing of the Fed’s liftoff will be left to the accompanying statement.

Most economists expect the Fed to acknowledge that economic growth weakened due to those six chilly degrees, a rising U.S. dollar and plunging oil prices. But the central bankers are also likely to underscore that if the data were to improve in the spring – especially readings on wage growth and core inflation – a September rate increase would still be on the table.

Bad weather may also have been to blame for the divergent data on the housing market: Existing Home sales showed life in March, while New Home Sales dropped off from the previous month’s strong showing (the best pace in seven years). Overall, sales have increased by 45 percent since plummeting to post bubble lows in mid-2010, but the housing market still remains well-below normal levels. With mortgage rates relatively low, credit conditions loosening and steady growth in jobs and incomes, the healing process is likely to continue, albeit slowly in many parts of the country.

One place that remains in a metaphorical deep freeze is Greece. According to Capital Economics, “There is now a real possibility that Greece could default on its debts in the next couple of months, plunging its future in the single currency into uncertainty. If a default prompted a big adverse reaction in financial markets then the Fed would presumably not want to risk adding to the volatility by hiking the fed funds rate.”

To close out this missive, it’s worth mentioning the NASDAQ Composite Index’s new milestone. After 15 long years, investors were finally treated to a new, nominal all-time high. On Thursday, the index finished at 5,056, eight points above its March 2000 peak of 5,048. Yes, it’s psychological and when adjusted for inflation, the level would have to be over 6,900 to be a record, but why not take the small victories when we can?

Here’s the REAL buzz-kill alert for investors: the Wall Street Journal’s Jason Zweig stumbled upon this fact: “since March 10, 2000, the S&P 500 has generated an average return of 4.78% annually; the Russell 3000, a broad measure of U.S. stocks, 5.12%. But the NASDAQ Composite, dominated by the tech stocks that were so overvalued in early 2000, has returned 0.99% annually. All these returns include dividends.” Those numbers also include the recent six year bull-run, which allowed the S&P 500 to climb by 250 (including dividends).


  • DJIA: 18,080, up 1.4% on week, up 1.4% YTD
  • S&P 500: 2117, up 1.8% on week, up 2.9% YTD (Record close)
  • NASDAQ: 5,092 up 3.3% on week, up 7.5% YTD (Record close)
  • Russell 2000: 1267, up 1.3% on week, up 5.2% YTD
  • 10-Year Treasury yield: 1.92% (from 1.85% a week ago)
  • May Crude Oil: $57.15, up 2.5% on week
  • June Gold: $1,175, down 2.4% on week
  • AAA Nat'l avg for gallon of regular Gas: $2.52 (from $2.45 week ago, $3.69 a year ago)


Mon 4/27:

Apple, Container Store

10:30 Dallas Fed

Tues 4/28:

Coach, GoPro, Kraft, Bristol Myers Squibb, Merck, Pfizer, US Steel

9:00 S&P Case Shiller Home Price Index

10:00 Consumer Confidence

Fed Policy Meeting Begins

Weds 4/29:

Baidu, Marriot, MasterCard, Starwood

8:30 Q1 GDP (1st Estimate)

10:00 Pending Home Sales

2:00 Fed Policy Meeting Announcement

Thurs 4/30:

Avon, Conoco Phillips, Exxon Mobil

8:30 Personal Income and Spending

9:45 Chicago PMI

Fri 5/1:

Clorox, Chevron

Motor Vehicle Sales

9:45 PMI Manufacturing

10:00 ISM Manufacturing

10:00 Construction Spending

10:00 Consumer Sentiment