WASHINGTON, September 20, 2017 – It’s 2 p.m. ET as we begin to write this column, and the Fed has just weighed in with its mid-month pronouncements. For the moment, the Dow Jones Industrial Average (DJIA), which had been moderately happy during anemic Wednesday morning trading action is waffling around the zero mark, while the S&P 500 is off slightly.
The NASDAQ has been hammered all day. It’s currently down 22 points, give or take, a roughly 0.3 percent loss that’s mainly driven by negative news on the functionality of the new Apple Watch and rumors that the iPhone X might ship late, thus nicking Apple’s (symbol: AAPL) usually big time Q1 2018 numbers.
Since CNBC and other major media outlets likely received the Fed’s written report somewhat prior to its release, we’ll rely on portions of their current reading on just what the Fed had to say about its balance sheet unwinding intentions, (aka, the selling of mass quantities of bonds it holds in its portfolio), as well as any sly hints of an interest rate in December.
Notes CNBC on the Fed’s massive though gradual bond dump:
“The Fed was not expected to raise its benchmark interest rate at this week’s meeting, though the market was expecting an announcement regarding the central bank’s $4.5 trillion balance sheet.
“In an effort to boost the economy during the financial crisis and accompanying Great Recession, the Fed undertook three rounds of bond buying — quantitative easing — in an effort to tamp down mortgage rates and provide liquidity to financial markets. While the first round was dedicated to mortgage-backed securities, the Fed eventually expanded into the Treasury market.
“Since beginning the balance sheet expansion, the Fed has taken the proceeds from maturing bonds and reinvested them. The Fed will allow a portion of those proceeds to roll off — $10 billion a month to start, then increasing in quarterly increments to $50 billion.
“Chair Janet Yellen has said the intention is for the balance sheet roll-off to be nondisruptive to markets.”
We’ll just have to wait and see on that “disruptive” thing. Meanwhile, the Fed is being coy with regard to inflation and GDP numbers, with many budget hawks on the Federal Open Market Committee (FOMC) likely still pulling for that 3rd 2017 interest rate hike possibly scheduled for December.
“In their quarterly economic projections, Federal Open Market Committee members now forecast economic growth to run a bit stronger than before. The committee’s expectations back in June were for a 2.1 percent GDP gain this year, but that was pushed to 2.2 percent in the latest projections. The long-run outlook for GDP remained at 1.8 percent.
“At the same time, the Fed reduced its outlook for inflation, cutting its expectation from 1.7 percent this year to 1.5 percent, and from 2 percent to 1.9 percent in 2018. In sum, that means the Fed now believes it won’t reach its 2 percent target until 2019.
“‘Market-based measures of inflation compensation remain low,’ the Fed said in a nod to slow wage growth. ‘Survey-based measures of longer-term inflation expectations are little changed, on balance.’
“The lack of inflation likely helped push the Fed to reduce the long-run target for its funds rate. While officials for years have been indicating that the rate would make its way to 3 percent, that forecast was reduced to 2.8 percent – effectively one fewer rate hike than originally indicated.”
Note: If you follow our link to the CNBC Fed report cited, language and paragraphs may change, as this is a breaking news story subject to additions and revisions. However, in our experience, the info we’re quoting seems to be in line with Fed perceptions of reality.
As we prepare to sign off for now, all three major averages are still down slightly, with the DJIA off about 10 points now for a marginal 0.04 percent decline. We expect stocks to thrash about for the rest of the day on relatively low volume. What the Fed seems to be saying is, “Yes, we’re going to start selling off that massive bond portfolio, but, though we’d like to hike those interest rates again, the numbers aren’t quite there yet to justify this move. In addition, we note that salaries are still stagnant.”
This latter observation is interesting. Since the beginning of the Trump administration, the Fed has had a bit more to say about this dismal wage news. The average American working stiff has spent a couple of decades at least enduring utterly stagnant wages and the attendant lack of buying power.
Until and unless working class and middle class wages begin to increase in a notable way, it will be tough for the Fed to keep hiking rates steadily inn 2018 and beyond. It’s primarily strong wage increases that tend to cause the inflation rate to increase. To a point, that’s actually what the Fed professes to want. Lacking that evidence makes a very poor case for relentless interest rate increases.
As we’ve noted here before as well, the Fed’s intention to start liquidating its massive bond portfolio might succeed in causing interest rates to rise all by themselves. No one, including all the financial gurus that promote their positions on CNBC, seems to have much to say about this effect.
Final note: As of 2:25 p.m. ET, the Dow is declining harder, off between 35-45 points, with the S&P 500 and the NASDAQ continuing to get hit as volume increases. Today will likely come to a sloppy, inconclusive end as the machines simply sell on this news.
We’ll be back later in our companion column to take a look after the market’s closing bell.