Federal Reserve Predictions 2016 – Recap April 2016

Update – April 28 2016

Not an overly surprising move in April 26/27 2016 announcement by FOMC that rates stay idle. Reports up to this meeting were that global economic factors weighed heavily in the minds of committee members prompting no rate movement in March 2016. The lack of movement in the rate for April is an indicator that global economic uncertainty isn’t going away and the US economy is tied to that uncertainty, the FEDs steadfast mantra of data dependency didn’t warrant an April rate move.

Here are some key items to think about going forward:

  1. FOMC press release did not have a reference to the global economy. March minutes had this reference. The message seems to indicate that the focus is local economic factors for April. This does not mean that the global economic factors aren’t considered.
  2. The break in economic momentum is another consideration. The US local economy expanded but at its slowest pace 0.5%. The FOMC saw this correctly and alluded to this in their press release.
  3. Employment numbers have again come back positive. Employers are hiring and holding on to their hires. This is a good sign, these numbers are watched closely by pundits for and against a rate increase.

What to look for in June 14/15 2016?

The global economic environment is already complicated and seems destined to hold this path. With the pending Brexit referendum bringing uncertainty to Europe in addition to the dire state Greece’s economics is and has been may divert global investors to the US.  My adjusted forecast for June 2016.

  • PCE: 16
    • No change
  • GDP:12
    • -3
  • Global Markets:5
    • -5
  • Employment Rate:9
    • +1
  • Fed Balance Sheet:5
    • No change
  • Outcome
    • 47%
  • Predicton April 2016: 47% probability that the FOMC recommends to raise interest rates

Update – April 7th 2016

We are in interesting territory as reports indicate inflation has edged closer to the FED target of 2%. With month after month of positive employment numbers reported from the US and  GDP by 1.4% in Q4 2015 what’s holding the FED back from raising rates in April?

The US is playing defense against global markets. The world has caught a financial cold.

With statements like this “a core group of policymakers who appeared to include Fed Chair Janet Yellen did not believe the market’s roller-coaster ride this year was over. Several “expressed the view that the underlying factors abroad that led to a sharp, though temporary, deterioration in global financial conditions earlier this year had not been fully resolved and thus posed ongoing downside risks.””  I have adjusted the Global Market indicator to reflect the negative news and sentiment awash in global financial markets.

Global Market indicator adjusted from 10 to 7. All other indicators stay the same bringing the probability of a rate increase in April to 52%.

Update – March 29th 2016

  • Janet Yellen message at a Economic Club In NYC – “Fed could envision a gradual pace of interest rate increases in light of global pressures that could weigh on the US economy”
    • WOW! That was likely the most forward and open Janet Yellen has been with regards to why interest rates were not raised in March and the tentative approach adopted by the FOMC for April
  • Inflation reported below FOMC target
  • US Jobs market is healthy – 242000 jobs added in Feb 2016, unemployment rate steady at 4.9%. January 2016 jobs numbers revised from 151000 to +172000

Taking all that into account: April 2016 outlook is as follows

  • PCE: 16
    • No change
  • GDP:15
    • No change
  • Global Markets:10
    • No change
  • Employment Rate:9
    • +1
  • Fed Balance Sheet:5
    • No change
  • Outcome
    • 55%
  • Predicton April 2016: 55% probability that the FOMC recommends to raise interest rates

Source:

  1. http://business.financialpost.com/investing/global-investor/yellen-stresses-the-fed-foresees-gradual-pace-of-rate-hikes-and-will-proceed-cautiously
  2. http://www.adeccousa.com/employers/resources/Pages/job-market-update.aspx

 

March 2016 is here and my prediction that the FEDs would raise their rates was incorrect. First things first, I will revisit the weight for the 5 categories I took into consideration in my initial analysis. Second, I will add a % likelihood of whether the FEDs would raise rates.

The report out of the FED today indicated two reasons on the rate hold as opposed to a rate increase – https://www.federalreserve.gov/newsevents/press/monetary/20160316a.htm

  1. Market based measures of inflation remained low. Survey based measures of longer term inflation expectations are little changed, on balance in recent months.
  2. Global economic and financial developments continue to pose risks.

Inflation and jobs

My research and reading indicate that it is very difficult to predict the sudden rise of inflation and the efforts to curtail this rise would take dramatic action from the FED. The jobs numbers are something that have been highly discussed and debated over the last number of months.

Some analysts have pointed out that the FEDs mandate of “full employment” has been reached and that this is an indicator that inflation is about to be dialed up. On the flip side of the argument, others have indicated the current jobs numbers reporting”full employment” isn’t really what it seems once the jobs numbers are drilled down in order to take into consideration the quality of jobs over quantity.

The FEDs themselves have not indicated the meaning of “full employment” however their statement today gave us a glimpse.

“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen.”

With the above statement, could the FED be indicating that jobs numbers aren’t what they seem and would like to see continued dialing up to be sure? Perhaps.

Global economic and financial developments

With regards to the FEDs consideration of the global economic conditions and their stance today. It’s no secret that world economies are connected. Reports from all around the world are that countries and economies not named USA are in trouble. The powerful US economy would be adversely impacted by the economic challenges these countries are currently facing.

  1. 2015 numbers Top 5 economies FOMC includes in assessment of world economic affairs: In Billions
    • China – Exports/Imports (116.2/481.9) (16% of total trade)
      • Currently slowing GDP
    • Canada – (280.3/295.2)(15.4%)
      • Currently in recession and slowing GDP
    • Mexico – (236.4/294.7) (14.2%)
      • Slowdown in GDP
    • Japan – (62.5/131.1) (5.2%)
      • Recession, experiencing deflation and have enacted negative interest rates

Revised numbers for March 2016. April 2016 outlook revised.

Inflation PCE Indicators

Weight:35%

New:30%

GDP

Weight:25%

New: 20%

Global Markets

Weight:20%

New: 35%

Employment Rate

Weight:15%

New:10%

Fed Balance Sheet

Weight:5%

Outcome:

FED Target 75

Recovery Target New: 100

Normal Economic conditions target: 80

Prediction
March 2016 25 – Trending up

15

25

15

5 15 – Trending up

7

5 75

47% chance the FEDS raise rates

March 15/16 – Rates go up .25%

Decision was to stand pat

April 2016 16 15 10 8 5 54 April 26/27 – 54% chance rates go up
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