A moment of clarity hit on Nov. 6 with the release of the October employment situation report. It actually took a full business day and the weekend for that moment of clarity to hit the market (the S&P 500 closed that Friday flat on the day then dropped 80 points the following week). Clarity came with the extremely positive employment report, which demanded a Fed rate increase at the December meeting.
It coincidently mirrored the Fed’s tapering decision. In both cases (2013 for tapering and 2015 for tightening) the Chairman of the Fed indicated a moved would come that calendar year. In both cases the market anticipated the move happening in September. In both cases economic data including jobs data and geopolitical concerns caused the Fed to delay a move in September. In both cases positive economic numbers— particularly jobs data— and a resolution to the debt ceiling was released prior to the December meeting, and in the case of the tapering the Fed’s cause of action was clear and they began a gradual tapering of the monthly Treasury purchases that were part of QE3.
After the October jobs report was released, newswires were reporting that this put a December rate hike back on the table. That, of course, begged the question: Who took it off? The answer of course was no one. However, when the Federal Reserve’s Federal Open Markets Committee (FOMC) failed to pull the trigger at the September meeting due ostensibly to weakness coming out of China, and additional weak economic numbers followed that, many analysts were talking about delaying any move until March 2016.
While there was great anticipation for a September rate increase, that did not come, the surprisingly strong October employment situation report appears to have locked in a December tightening.
The problem is that a September tightening was pretty much locked in back in August. While the August correction followed huge losses in the Chinese stock market as well as the Chinese central bank devaluing its currency, one can argue that anticipation of a September rate increase was a large factor in the correction. At the time of the September FOMC meeting, we wrote, “Why put ourselves through this all over again by delaying tightening.”
Well, there is four weeks until the December FOMC meeting and a lot can go wrong in four weeks. Just today I read a headline following the release of the October industrial production report noting weaker than expected numbers could move the Fed to delay a December move.
The Fed should have ended the speculation and raised rates the Monday after the October report. The S&P 500 closed the week ending Nov. 13 down 80 points. How much worse could it have been? It may have sparked a relief-rally.
The idea that the Fed can only move interest rates following an official FOMC meeting (and one with a Fed Chair press conference) is a new phenomenon. I understand inter-meeting moves usually only occur following market shocks, but in a sense the October jobs report qualified. It provided a rare moment of clarity. Why risk going back and measuring every new data point. What the market needs is clear direction. It would have been refreshing for the FOMC to hold an impromptu meeting and say the increase payrolls coupled with the positive rise in hourly earnings provided the final evidence it needed that the six-year economic recovery was strong enough to justify moving off of the zero bound target.
Like quickly ripping off a band aid, it would have provided relief and free us of further speculation. In a sense it would have been precisely what the economy and market needs. No more waiting around to take on a loan or make an investment in new equipment until someone else says that the environment is ok to invest. No more endless hand wringing. No more delaying to allow doubt to once again creep in.
No interest groups lobbying the Fed through the media. No deep analysis and amateur psychological profiles of the various Fed voting members. Just a one or two sentence announcement stating the zero-interest-rate-policy lasted long enough and the Fed will begin moving interest rates towards more normal levels.