By Adam Sarhan 6/5/15
The Fed’s Dual Mandate:
We want to begin by saying anything is possible but, when making investment decisions, we look for what is probable. After all was said and done, the latest round of “data” paints a mixed picture and keeps the Fed’s back against the wall. The Fed has made it abundantly clear that they remain data-dependent and will not raise rates until the “data” improves. Remember, the Fed has a dual mandate: Help the economy and keep inflation near its 2% target. Right now, neither objective is being met which is why we do not think the Fed will raise rates until the “data” improves.
First the economy, the economy contracted in Q1 (even with rates at zero) and last week two major global organizations (The OECD and the IMF) downgraded their economic forecasts for both the global and U.S. economy (even with rates at zero). The IMF actually took it one step further and very publicly urged the Fed not to raise rates until 2016. The latest surveys show that the economists believe Q2 GDP will grow around 2% which means the U.S. economy is poised for its worst first-half performance since 2011…WITH RATES AT ZERO. The brightest economic data point we saw in a very long time came on Friday morning when the government said U.S. employers added 280k new jobs in May, beating the 220k estimate. At this point, we do not feel that one data point will significantly move the needle but if we get more stronger-than-expected data over the next few months than we can not rule out a Fed rate hike later this year.
Looking at inflation, even with global central banks printing trillions of dollars out of thin air to stimulate the global system, deflation remains more of a threat than inflation. That means the Fed is nowhere near its 2% inflation target. Remember, the Fed has told us that they remain data-dependent and that we should continue to interpret incoming data for signs of what they will do next. At this point, the “data” remains mixed and the Fed, and market participants, remain “data-dependent.” From where we sit, we do not think the Fed will raise rates until at least one objective is met.
Of course, we know anything is possible and will be prepared to act if/when the facts change. Until then, we expect this sideways/slow grind higher to continue in equity land. Currency and commodity markets are trading like penny stocks because there is so much uncertainty regarding the health of the global economy. remember, most commodities are in their own bear markets even as stocks are near record highs. That speaks volumes regarding the Fed’s dual mandate (not being met). Bottom line, how can the Fed argue a rate hike if both objectives are not being met?