Walking Slowly in a Dark Room

Ralph 2016-11.jpg

by Ralph Cole, CFA
Director, Equity Strategy and Portfolio Management

When the Federal Reserve meets next week, everyone will be waiting to hear what they have to say about future interest rate hikes. Let’s review some of Fed Chair Jerome Powell’s comments from earlier in the year and see if that gives us any indication regarding what he might say next week and, more importantly, what is the future direction of short-term interest rates.

Every August the Federal Reserve Bank of Kansas City hosts the Jackson Hole Economic Symposium. This invitation-only conference is attended by central bankers and their staffs from around the world. At this year’s event, Chairman Powell came across as acutely aware of the main policy errors that the Federal Reserve can make: “moving too fast and needlessly shortening the expansion, versus moving too slowly and risking a destabilizing overheating.” His speech sent a dovish message to the audience about the Fed’s expected pace.

But what would cause the Fed to raise rates too quickly and cause an economic slowdown?  The answer: inflation. The Reserve Board has set a target inflation rate at 2 percent, with a “symmetrical” range around that central target. CPI came in the week at 2.2 percent, and that appears to be well within that symmetrical range. At this point, there is no reason for the Fed to accelerate rate hikes.

Source: Bloomberg

Source: Bloomberg

Is the Fed raising rates too slowly, thereby risking a “destabilizing overheating”? We don’t think so. We think the Fed will raise rates for a fourth time this year next week. Current expectations are for one or two more hikes this year.

More recently, at an appearance at the Economic Club of New York, Chair Powell was asked about how to gauge the proper pace of tightening based on this recovery compared to past recoveries. Powell continued his dovish commentary, making the analogy that it was, “like being in a room filled with furniture and the lights go out, you slow down, and you feel your way more. That is what we have been doing with monetary policy.”

Week in Review and Our Takeaways

  • Trade and economic growth continue to drive market volatility daily, with stocks ending the week down a little more than 1 percent

  • Chair Powell is well aware of the risks associated with Fed policy and is taking a very measured approach this tightening cycle