Why The Fed’s Not Tightening Any Time Soon

There’s been a lot of chatter in recent months about the improving economy and the potential for Fed easing.  Some have said it could occur as early as the June FOMC meeting.  I think this is likely to be wrong.  Here’s why:

1)  We’re in the backstretch of the recovery.  We’re now into month 47 of the current economic recovery.  The average expansion in the post-war period has lasted 63 months.  That means we’re probably in the 6th inning of the current expansion so we’re about to pull our starter and make a call to the bullpen.  The odds say we’re closer to the beginning of a recession than the beginning of the expansion.  That puts the Fed in a really odd position and not likely one where they’re on the verge of tightening any time soon.

2)  Unemployment is still way too high.  The Fed has been clear that the real tightening will start when they see unemployment at 6.5%.  Even the most optimistic projections have us hitting that rate of unemployment some time next summer.  That means we’re still a full year away from the Fed’s target.  See here for more.

3)  Corporate revenues are starting to falter.  Companies hire when they’re swamped with demand.  And based on corporate revenues demand is at its lowest point since the recovery began.  That means the likelihood of hiring picking up steam is extremely low.  More likely, corporations will play it safe and try to maintain margins as they offset revenue weakness with cost cutting.  If hiring isn’t going to gain momentum then the Fed isn’t easing.  It’s that simple.



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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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  • larry

    could tapering be deflationary? with inflation already low

  • SS

    The media is just trying to drum up a story so they keep trying to make it seem like the Fed will tighten.

  • Stephen

    Agree.Global growth is slowing and will end up lower due to Western markets no longer able to suport Asian/Emerging growth trend. It’s over,rebalancing means everyone get’s reset lower AND whilst there is a mighty labour output gap to close that isn’t happening anytime soon. Frankly,I am at a loss to understand why the frighteners on this issue at this time. It’s not supported by any data worth talking about.

  • Johnny Evers

    The brokerage firm Edward Jones just sent out letters warning its clients that if interest rates rise their bond holdings will decline.
    It has the usual boilerplate disclaimers, but they are clearly trying to cover themselves for the possibility that rates do rise and angry clients kvetch about their bond funds ‘losing money.’
    In general, I believe it’s impossible to predict future interest rates — except that when they are up they usually come down and when they are low they eventually go back up.
    The Fed has some impact on rates but it doesn’t have complete control.

  • Geoff

    It depends what you mean by “tightening”. To me, tapering QE is not tightening. Raising short-rates is tightening. So I agree the Fed won’t be tightening any time soon.

  • Geoff

    Assuming investors have a diversified portfolio, they should welcome bond losses as it likely means the rest of their portfolio (and the economy in general) is doing well. Bonds are a hedge.

  • Geoff

    I guess I should have said savers instead of investors :)

  • jaymaster

    I can’t help wondering if this expansion might last longer than average, and quite possibly MUCH longer than average, based on the following:

    1. This is a balance sheet recession, as opposed to a more common “business cycle recession”.

    2. Balance sheet recessions typically take much longer to correct, or turn around.

    3. The recovery actually has been much slower to date than other recessions.

    So why shouldn’t we expect this slow growth, muddle-through environment to continue to draw out for many more months, if not years?

  • Cowpoke
  • Johnny Evers

    When I got started in this business, they taught me that when stocks go down, bonds go up …. one of the many, many things that did not turn out to be true!
    Should ‘savers’ own stocks? My answers would be: a) not if they are going to need that particular money for at least 5 years, and b) only if they have the stomach for short-term losses.
    Cullen calls investments ‘savings’ but I wonder if he breaks it down to short-term savings and long-term savings.

  • Geoff

    True, bonds weren’t such a great hedge in the 1970’s!

  • http://orcamgroup.com Cullen Roche

    I try to be more specific. Secondary market transactions are an allocation of savings whereas primary market transactions are where we make our real investments. I think primary market transactions are inherently more risky so it’s really important to understand the difference between the two. If we drew an efficient frontier primary market transactions would be the furthest point out on the curve. So, when we’re constructing portfolios it’s super important to understand why primary transactions are different than secondary market transactions. If you’re building a portfolio you need to understand these concepts so you can appropriately measure the risks you’re taking. I think proper portfolio construction is about understanding how different strategies, approaches and assets balance one another out. The idea of a savings portfolio is simply a more specific way of understanding this thinking.

  • jhs

    Biggest question imo is how long people are going to keep faith in central banks. If 47 months of stimulus can’t create better manufacturing data then the question seems to be if there’s actually any evidence left that a central bank – or government for that matter – can help the economy.

  • johnw

    My cause for concern is the sheer scale of monetary easing taking place in Japan and the inevitability of a continuing large devaluation of the yen. As John Mauldin warns, Japan is manipulating a currency war and embarking on a programme of exporting its deflation and implies that unless the Fed and other western central banks follow suit it could well result in consumers being able to buy a top of the range Lexus for the same price as a bottom of the range Ford. . . and I fear he may well be right!

  • Rob

    “The average expansion in the post-war period has lasted 63 months. That means we’re probably in the 6th inning of the current expansion so we’re about to pull our starter and make a call to the bullpen.”

    What a ridiculous comment. Honestly, for a site that does such a decent job of explaining things, how can you much such a silly statement?

    This was not an average post war recession. It was a credit/financial crisis. You know this.

    The depth of the recession was not average or normal.

    The market responses were not average or normal.

    The policy responses were not average or normal.

    The job losses were not average or normal.

    Nothing about this recession was average or normal, yet, you think the recovery will be???

    What on Earth would lead you to that conclusion?

  • http://orcamgroup.com Cullen Roche

    I don’t think anything I’ve written there is inconsistent with the thinking that we’re likely closer to a recession than we are to the beginning of an expansion. I’ve always maintained that we’re in a very soft and abnormal recovery phase. In my opinion, that increases downside risks. The fact that historical expansions are 63 months actually adds fuel to the “risks to the downside” view that I’ve long been working under….

  • Jeff K

    O/T this article seems to “imply” that which you are not implying.. Can you clarify your statement here?

    “From the perspective of informed conservatives, the continually growing deficit is still a problem,” said Cullen Roche, founder of Orcam Financial Group. “Sure, the deficit might be shrinking, but that’s like the fat guy who is putting on 20 pounds a year, vows to lose weight and then celebrates next year when he only puts on 10 pounds. It’s the absolute size of government spending relative to the economy that worries conservatives.”

    Follow us: @washtimes on Twitter

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Glasner looks at the question of Japan as a currency manipulator too:


    That first comment is Sumner..

  • http://orcamgroup.com Cullen Roche

    Well, it is about understanding the real constraints on the economy. Those of us who understand the US monetary system know that the amount of debt poses no solvency threat that might cause us to “run out of money”. So the real constraint is the inflation constraint. Informed liberals and conservatives both know this. But they’ll argue different points. Liberals will argue that the deficit is inflationary, but good inflation in that it adds to output, aggregate demand, etc. Conservatives will be more likely to argue that the govt’s increasing involvement in the economy is a problem in that it could water down output and cause long-term inflation problems as aggregate supply deteriorates. They’re similar arguments that argue differing results.

  • http://orcamgroup.com Cullen Roche

    Kuroda and Abe have both been adamant that Abenomics is consistent with a declining foreign exchange rate. This is basically the “Chuck Norris” effect that MMers always talk about. They might not be setting specific targets as the MMers would prefer, but I don’t see how any MMer could claim they’re not manipulating their currency. They’ve been abundantly clear that one of the goals of Abenomics is to drive the yen lower even if they’re not directly targeting the Yen.

  • johnw

    Interesting – Thank you Tom.

  • Bruce

    I agree, there’s some ambiguity about whether he’s talking about outright “tightening” or tapering QE. We need to get to tapering before we can talk about tightening.

  • http://brown-blog-5.blogspot.com/ Tom Brown

    Well, Glasner does write:

    “So I regret to say that my initial quick look at the currency manipulation issue does not allow me to absolve Japan of the charge of being a currency manipulator.”

    … but then this may not be the MM position, as Glasner writes in the comments: “I am not authorized to speak on behalf of MM.” (he’s juts an “MM sympathizer” after all).

  • fin

    you have pointed out several times before, looks like Rob didn’t follow your blog closely.

  • Rob Jones

    I just Zillowed my house. The value is up almost $200K from the last time I looked early in 2012. And there is a similar house down the street listed for an additional $200K above the Zillow value and the sale is listed as “pending”. The for-sale sign just went up last week.

    It is 2006 all over again!

  • jswede

    2006 again except for the available credit… beautiful time to sell re. what a gift.

  • Not an Economist

    “It is 2006 all over again!”

    It sure feels that way in certain areas…let me guess, you live in CA?

  • Anonymous1

    The fed’s not tightening soon………….GREAT, more liquidity for flipping houses and buying Tesla shares. The weather is too nice to debate this nonsense. Fine no interest rate increase, let’s party on. I recommend the summer shandy.

  • DJ

    The first reason is no reason at all. Just going by the number of months, we are always going to be the backstretch of a recovery and closer to a recession.

  • Anon

    Nice points. It doesn’t hurt that Bernanke’s academic conclusions on the timing of tightening are uniformly dovish. To his credit, I think he’s realistic about the history and the macroeconomic consequences of QE writ large. To his detriment, I think he’s delusional about it’s impact on the markets. Whenever he’s challenged on market distortions, he suggests that it’s merely a sign investors are affirming the program’s wisdom. I wish that were true.

  • Andrew P

    The Fed has no choice but to taper, at least with Treasury securities. The “debt limit” has been reached, and so Treasury issuance has to decline. Also, Fannie and Freddie are paying such large remittances to the Treasury that the deficit is going down.

  • Andrew P

    So, you much can Japan push the Yen lower before Z. Germans stamp their feet, shout Nein Nein Nein, and tell the ECB to start buying Yen?

  • InvestorX

    Where do you get the data for 3)? I have seen a negative number recently.