Federal Reserve Likely to Raise Rates

Dan Celia
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Posted: Dec 14, 2016 12:01 AM
Federal Reserve Likely to Raise Rates

It looks like we can expect an interest rate hike by the Federal Reserve this week. Is it just me, or is hardly anyone talking about the impact this might have on the markets? No one seems to be very concerned over the Federal Reserve raising rates or what this could mean for markets going forward.

I remember when, just a few months ago, the very thought of raising rates had every financial news network parsing the meaning of a potential rate hike for two weeks beforehand, and then for a week afterwards when it didn’t happen. Today, this prospect hardly merits mention.

Exercise in Irrelevancy

Once again, this relative silence proves what I’ve been saying for quite some time about the irrelevancy of the Federal Reserve and central banks around the globe. Lately, the relevancy of the Federal Reserve only relates to whether it might boost the markets. 

After all, for the past eight years there hasn’t been any opportunity for gains due to the weak fundamentals of the economy. The only thing the financial markets had was cheap money, or maybe some global quantitative easing. It’s important to understand that this is not a concern now for one reason and one reason only: interest rate hikes are irrelevant because the market party—as led by the Fed—is over.

Not only is Donald Trump obviously taking away the punch bowl, everybody knows it. In its place, he is proposing policies that hopefully will lead to an economy led by pro-growth ideals rather than the false narratives or false positives that have characterized the markets for some time.

Time for Real Growth

It’s time for some real organic growth in the underlying fundamentals of the economy, which will lead stock prices higher as a result of corporate America actually investing in America. We may see jobs being created in order to lift us out of 1978-level labor participation rates, as regulatory burdens are lightened and begin to make some sense. We hopefully will also see a tax code that small businesses and large corporations alike can use to improve their bottom lines. 

Yes, what we are seeing is the punch bowl being removed after an Obama administration that had no idea how to create a growing economic environment. We are seeing the end to an economy that had adopted the idea that everything is wonderful, despite a 1978-level work force participation and more people out of work today than when Obama came into office. Until now, we have been asked to pretend that everything is perfectly OK. Even though so-called “full employment” does not take into consideration meager labor participation rates.

The End of Low Growth

The Federal Reserve becomes even a bit more irrelevant when we take other factors into consideration, such as seven straight years of 2 percent (or lower) GDP growth, which is about to end. Instead, we are entering an era of an administration that will work hard to achieve a much greater GDP growth. Just 3 percent GDP growth in even one year would be something we haven’t seen in 16 years; this would be a blessing in and of itself.

I believe much of what we are seeing in the markets, including ignoring what the Federal Reserve is doing, is because the attention of business leaders is finally focused on what is really important for their companies—namely, a thriving and growing economic enviroment with sane fiscal policies coming out of Washington coupled with regulations that will incentivize corporate America to grow and become profitable as the demonization of profits and growth comes to an end. 

From my perspective, such developments are long overdue.