Hopefully! By the time you receive this post, the people of Greece will have spoken and that drama will be at an end. Or, will it? To be sure, it is noise. But, regardless of the lack of impact a default, or a Grexit might have on Europe or the world economy, the media cannot let it alone. My hope is that the vote is not a squeaker, no dead Greeks voting or hanging chads. Whatever the outcome, even if a resolution is not quickly apparent, there will be something else bad out there that the media will begin to hyperventilate on. This is guaranteed.
What might that be?
Well, I am certain, lest some unforeseen catastrophe strikes (whatever the Greek outcome is), laser media focus will move to the Fed — Wednesday’s Federal Open Market Committee (FOMC) meeting and a speech to be given by Janet Yellen this Friday. The pundits will be speculating and parsing every word. They will be pondering the age-old (or so it seems) question, when is the dreaded ‘liftoff’? How much and how many Fed Fund rate bumps do we get, and over what period of time, as the Fed begins its inexorable move to normalize interest rates?
A Few Observations
If you are worried about a sharp rise in the FF rate, which nobody at the Fed is clamoring for (see “Interest Rate Mystery Solved”), I thought sharing a past recent example (June 2004 to June 2006) might be enlightening. BTW, thanks to Matt Burleigh (a former client/ long-short REIT portfolio manager), for sharing this data.
Between June 30, 2004 and June 30, 2006, the Fed moved the FF rate from 1.25% to 5.25% (Source Material). During that same period the 10-year UST note went up all of 37 basis points, from 4.62% to 4.99% (Source Material). In this environment, if it happened, what would be the impact of a FF increase of 2% over two years? Matt makes the point that maybe there was a greater demand for long U.S. Treasury securities back then: or, it was a flight to safety as we have seen so many times recently, where the potential economic weakness that might be caused by higher rates caused investors to run for cover. Ironically, during the 2 year period in question, the S&P 500 rose 12.24%. So, whether it is one increase of a quarter point increase in September (one and done) or there is another in December (two and done), based on past history this will not be the end of the world.
Then again, it could be ‘none and done’
In recent times, I’ve always believed it would be nice for the Fed to have some ammunition in the gun (pardon the firearm reference), other than Quantitative Easing, to bolster the economy in case of an unforeseen emergency–like the ability to cut the FF rate (there’s nothing to cut these days. However, there is another tool at government’s disposal– that because of Washington gridlock, has been forgotten — fiscal policy. Don’t laugh. When push comes to shove, Congress will act in its own best interest (staying in office). Remember TARP, The Stimulus and the Auto Bailout, all were enacted at a time when many felt the end was nigh.
In a slow-growth, low-inflation economy such as we continue to experience, there are those smarter than me suggesting this to be a possibility of ‘none and done’. This would be a big negative surprise to those pushing bank stocks and financials as beneficiaries of rates moving higher. The group has way outperformed the market this year.
So, the end may be nigh for something, but not for the bull market.
What do you think?
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