Janet Yellen ‘Jawbones’, Participants Tired
The US economy is growing moderately after a Winter stall, and “likely” strong enough to support an interest rate increase by the end of the year, Fed officials indicated Wednesday.
Professional participants suffering acute macro fatigue, most professional fundamental stock pickers prefer to be rewarded for focusing on corporate investment stories. Not Fed jawboning.
After contracting in Q-1, the economy is now on track to grow a paltry 1.8 – 2.0% this year, according to the central bank’s latest policy statement and new projections reported Wednesday.
The Fed said labor markets continued to improve, though with unemployment expected to be slightly higher at the end of the year than previously forecast in March. Inflation remains low but is expected to gradually rise to its 2% target over the medium term, the Fed said.
The statement and forecasts keep the Fed on track to raise rates sometime during remaining policy-setting meetings in 2015.
Fed policymakers maintained the current Zero + interest rate for now and said a hike would “only” be appropriate after further improvement in the labor market and greater confidence that inflation would rise.
“Economic activity has been expanding moderately,” the Fed said in its policy statement following a two-day meeting. “The pace of job gains picked up while the unemployment rate remained steady. On balance, a range of labor market indicators suggests that underutilization of labor resources diminished somewhat.”
In the projections, Fed officials lowered expectations for GDP growth in Y 2015 after accounting for a weak start to the year. It was the 2nd time since December that the central bank has downgraded its GDP forecast for this year.
But 15 of 17 Fed policymakers still indicated the 1st rate hike “should” take place this year, no change from their previous set of predictions.
The policymakers’ individual projections for the appropriate federal funds rate at year’s end remained clustered around 0.625%. However, 7 policymakers are now in favor of hiking rates only once or not all this year.
Fed officials see slightly lower rates at the end of Ys 2016 and 2017 than forecast in March.
With rates currently set at a range of between Zero and 0.25%, that might imply 2 quarter-point rate hikes between now and the end of the year, with many analysts predicting an initial hike in September. and some saying none till Y 2016..
The central bank’s maintained its open-ended commitment to keep rates low to counter the worst downturn since the Great Depression.
Professional particpants do not get into the game to place money at the mercy of macro forces and official policies. They prefer to evaluate industries and businesses and select the potential winners from losers.
Yet the dominance of monetary policy and policy eruptions such as the interminable Greek bailout talks obscure those skills and stokes a fruitless debate over how much of this Bull Market is “real.”
The latest Bank of America Merrill Lynch global fund manager survey reveals the way hard-to-predict policy matters cloud the investment picture. The proportion of investors saying they have “taken out protection” (hedges) against a sharp decline in stock prices over the next 3 months is the highest in seven years, thanks to the Fed and Greece overhangs.
Savvy participants are selling into this market, ahead of a major pullback, or massive correction.
The Big Q: Is there a chance, that participants will soon get some relief for this macro fatigue?
The Big A: There are tentative signs that this is happening. The CBOE derivatives exchange tracks something called the “implied correlation” of stocks in the S&P 500, or the indicated degree to which most stocks are moving together, as in a herd. The gauge has been declining since last October, and is well below peak readings set during the European debt and US debt ceiling crisis of Y 2011.
Stay tuned…
HeffX-LTN
Paul Ebeling
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