As long as risks to the upside are limited; global growth is not on sound footing and fears of deflation still exist in both Europe and Japan, the Fed should remain on hold. The world needs more growth rather than less. Global risks still exist primarily to the downside.
I still believe that the Fed should not raise rates until December at the earliest, and only after data points support expanding U.S and global economies for 2017 and 2018. It's time that the Fed acknowledges, as one of its key data points, what is happening abroad and fully considers the impact of its policies on all markets and vice versa. Globalization is a fact of life.
While I support a return to normalization as soon as possible, now it not the time as the risks to the downside still outweigh fears of an overheating economy with inflation breaching 2% and rising. Bond yields and currencies here and abroad have been relatively stable recently indicating that some sort of an equilibrium point has been reached. If the Fed raises rates, it risks destabilizing all markets, which is unhealthy, and may halt what improvement in global economies, albeit slow, has been occurring. The fact that Brexit did not damage the markets as many feared is no reason for the Fed to act now. Also, recent domestic data certainly does not support an accelerating economy much beyond an inventory adjustment adding to growth.
I made three points recently that need repeating.
First, the Fed is getting a false positive reading from the employment data. The truth is that companies are substituting labor for capacity expansion. Operating rates have breached levels of efficiency.
Second, consumer spending remains the only real area of strength and would be at risk if the economy slows or the value of financial/real assets decline due to Fed actions. Yes, the saving rate would rise benefitting many who have suffered from low rates.
And finally the "disruptors" like Amazon and Uber as well as the competitive aspects of globalization will continue to keep downward pressure on prices and inflation. Bottom line is that the Fed has nothing to fear by waiting longer to hike rates.
While I really don't think that a slight uptick in the Funds rate will alter the trajectory of the economy much, it could negatively impact the mindsets of business leaders and consumers here and abroad. Why take the risk? Is the economy running away and inflation accelerating to a point of concern? No!
I am also concerned by the upcoming election and the markets' reaction. Personally I have no confidence in either Presidential candidate and am hoping for a stalemate in DC with one party controlling the House and the other the Senate. It's a shame as so much can be done in DC to stimulate growth and restore the U.S to its lofty status in the world. Will it be another lost 4 years? Is maintaining the status quo the best we can do?
If it were not for the resilience and brains of the U.S businessman and the strength in the consumer, it would be easy to take some chips off the table especially after outperforming the market. But I go back and review my core beliefs, challenging each of them; and then look at the financial markets. Bearishness is everywhere; there are records levels of cash; and the yield of the stock market exceeds 10-year bonds. Finally, change is everywhere creating tremendous opportunities to profit as an investor.