Stop with the slow pace talk

April 9, 2015 11:49 AM

The economic numbers for the month of March so far has been what they call “soft.”

Economic growth in Q1 2015 has not kept up with expectations and the March employment situation report was a slap to the face with nonfarm payrolls coming in at 126,000, more than 100,000 below expectations.

This occurred just as there was some momentum building up behind the idea of a June tightening. Worse yet we are once again hearing people and Fed officials talk about the need for the Fed to take it slow. Really! Take it slow? What the heck would you call six plus years of zero-interest-rate policy (ZIRP)?

Taking it slow is cooked into the books. No one is expecting or has recommended raising rates by 50 basis points at every meeting beginning in mid-2015. What most are assuming is a mid-2015 rate increase by 25 basis points followed by staggered increases of 25 bps at every other meeting.

For analysts and certain Fed officials to urge caution, suggests someone is suggesting anything else. And no one has. That ship has long sailed. The Great Recession officially ended in June of 2009 making a June 2015 tightening (the earliest expected increase) six full years after the official end of the recession. I have not gone over all the data but think it is safe to assume that in the 100 plus year history of the Fed, which has never happened before. A six-year expansion—albeit slow—with no rise in the Fed funds rate. Now I understand that this was an extraordinary event and the economy had not recovered in June of 2009 and, what recovery we saw was extremely weak and spotty until more recently but we have had recessions where the low (1990-91) Fed funds rate was 3%. 

The first increase didn’t come until almost three years after the end of that recession, which was also characterized by tepid growth. But it was coming from a base of 3%, not zero.

Looking over Fed data for the past quarter century it is clear that the Fed is much quicker to ease rates than to tighten. Many analysts attribute much of the credit crisis to the Fed maintaining extremely low rates well into a recovery.

Fed governor Jerome Powell recently suggested the economy was nearing full employment and acknowledged tightening should begin "well before" the economy reaches its twin goals of full employment and stable (2%) inflation. While many would dispute his employment comment, If we are indeed close, interest rates should be closer to normal. Some sort of equilibrium level, say 4.5%, where the Fed could react up or down. We are still at zero. 

 No one is suggesting moving rates a couple of full percentage points in a year. What seems clear is an abundance of caution regarding moving rates too quickly but not a whole lot of worry regarding being too slow.


About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.