Tahoe MArket Pulse: The market’s message — rates will remain low
September 7, 2016
Last week's disappointing August jobs report along with the poor reading on the manufacturing sector should be enough to keep the Fed from boosting rates this month.
The latter was the worst reading in seven months and shows that the manufacturing sector is now contracting. Investors took it all in stride. I suspect the Fed will as well.
Central banks in Japan, Europe, Australia, New Zealand and elsewhere are cutting interest rates, in many cases below zero with so far little impact on their economies.
And the Fed will be raising them? I don't see it…nor do the financial markets. Keep in mind that the market dictates to the fed, not the other way around.
The financial markets are saying that monetary policy has done all it can and after eight years of near-zero interest rates it is almost irrelevant.
Fed chair Janet Yellen spoke last week and as usual the financial media hung on her every word. Once again she said that if the data confirm the economy is strong enough to tolerate another rate boost, that's what we'll see.
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Nothing new there. Yellen did say that in the future the Fed may buy not only Treasurys and mortgage packages, as they do now, but follow the European Central Bank's lead and add corporate bonds as well. That was new. It seems the Fed is concerned that it may have little ammunition with which to counter a recession. They are right.
Interest rate levels and changes are just one aspect of the economic picture. If there is to be growth, fiscal and regulatory policies worldwide need to change because monetary policy alone won't do it.
Business investment is the key. This year's welcome if slight improvement in the labor and wage numbers has come at the expense of business spending and investment.
Companies are using labor rather than capital given its cost advantage/flexibility and many uncertainties about the future economic environment.
But that is not a recipe for long-term growth. Pro-growth fiscal and tax policies that don't change with each administration would bolster confidence and encourage business investment. There is little hope for that no matter who is in the White House. Too bad.
Bottom line: investors don't believe the Fed will raise rates much, if at all. I agree.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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