Fed Waves The White Flag On More Interest Rate Hikes by Gary D. Halbert

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert

June 21, 2016

IN THIS ISSUE:

1. Fed Votes Unanimously to Leave Rates Unchanged

2. Fed’s Economic Predictions Once Again Too Optimistic

3. President Obama & CIA Director Disagree on ISIS Threat

4. WEBINAR: Consumer Linked Income Portfolio – June 22

Overview

As I and others predicted last week, the Fed voted not to raise short-term interest rates at its June 14-15 policy meeting. In light of the terrible May jobs report on June 3, policymakers decided that the US economy is not strong enough for a rate hike at this point.

Not only that, the Fed also appears to be backing off of its earlier intent to raise rates at least two more times this year. Six of the 10 voting members on the policy committee now see only one minor rate hike this year, most likely at the September 20-21 policy meeting, if at all.

Following that discussion, I want to turn to a political discussion which has overheated in the last week or so. In the wake of the Orlando terrorist attack on June 12, President Obama has come under intense political criticism over his refusal to utter the words “radical Islamic terrorism.”

In what most analysts agreed was the angriest speech of his presidency, Mr. Obama lashed out at his critics last Tuesday and declared that we are winning the war against ISIS. Yet just two days later, the Director of the CIA testified before Congress that we are NOT winning the war against ISIS. He said the radical terror group remains as strong as ever and warned that there will likely be more attacks like Orlando in the weeks and months ahead. This is stunning!

Why President Obama chose to give the rosy assessment of the war on ISIS just two days before CIA Director John Brennan was scheduled to testify before the Senate Intelligence Committee is a mystery to me. Maybe it’s just because he was so angered by all the criticism, or maybe there’s more to it. I’ll give you my thoughts below.

Fed Votes Unanimously to Leave Interest Rates Unchanged

To almost no one’s surprise, the Fed voted not to raise its key short-term interest rate last Wednesday. While a number of Fed officials were vocal about raising the rate late last month, the very disappointing May unemployment report on June 3, which showed the economy produced only 38,000 new jobs last month versus a projected 160,000, dashed any hope of raising the Fed Funds rate in June.

The surprise was that the decision was unanimous among the 10 voting members of the Fed Open Market Committee (FOMC). Also surprising was the fact that six of the 10 voting members called for only one rate hike this year instead of two.

More members have decided that the US economy is simply not strong enough for two rate hikes this year. Now many Fed watchers are questioning whether there will be even one rate hike in 2016. The Fed Funds futures market now sees only a 38% chance of a rate hike in September and a 56% chance in December.

As I suggested last week, several FOMC members, including Chair Janet Yellen, wanted to see the outcome of Great Britain’s “Brexit” vote on whether to leave the European Union on Thursday. With regard to the Brexit vote, Yellen said in her post-meeting press conference:

“It is a decision that could have consequences for economic and financial conditions in global financial markets. If it does so, it could have consequences in turn for the U.S. economic outlook that would be a factor in deciding on the appropriate path of [interest rate] policy.”

Obviously, Yellen and her colleagues continued to wrestle with conflicting US economic data over recent weeks as they pondered when next to lift the Federal Funds rate. The Committee first raised the benchmark rate back in December, ending seven years at virtually zero.

The Fed’s on-again, off-again position on raising the Fed Funds rate a second time has led to confusion among investors and a growing belief that the Fed lacks a clear vision of upcoming policy direction.

Fed’s Economic Predictions Once Again Too Optimistic

At her press conference last Wednesday, Janet Yellen’s statements, combined with economic projections from individual FOMC members, showed that the Fed Chair and her colleagues are rethinking their belief that the US economy will soon return to normal.

For years, Fed projections for US economic growth have been overly optimistic, with repeated predictions that the American economy would fairly quickly return to the sort of robust growth it was used to before the Great Recession of late 2007-early 2009.

Those projections never came true, and Fed economists have repeatedly revised down their projections of where growth and interest rates will be in the future. For example, the Fed revised down its estimate of the Fed Funds rate for 2017 from 1.9% to 1.6%, and for 2018 from 3.0% to only 2.4%.

These continued downward revisions reflect the growing reality at the Fed that this economy is not going to return to “normal” growth levels of 3% or better anytime soon. Perhaps this explains why more members of the Fed policy committee are backing away from multiple rate increases this year.

President Obama & CIA Director Disagree on ISIS Threat

In the days following the June 12 Orlando nightclub terrorist massacre which saw 49 innocent people killed and scores more wounded, President Obama received heavy criticism for his failure to call the tragedy “radical Islamic terrorism” – even though the shooter praised ISIS in one of his calls to police and was previously on the FBI’s Terrorist Watch List.

Mr. Obama was so angered by the widespread criticism that he took to the airwaves last Tuesday with a televised speech in which he excoriated his critics and angrily defended his rationale for not using that specific term. Unfortunately for him, his argument was very weak.

In that same speech, the president stated that the US is making “significant progress” in the fight against ISIS (or ISIL as he calls it) and made numerous claims of success against the terror group. He claimed that ISIS is now on the defensive in Syria and Iraq and has been so degraded that the organization is no longer capable of mounting serious attacks in the region.

He even said the terror group is struggling financially thanks to our efforts. The president said the US war on ISIS “is firing on all cylinders” and the group “is under more pressure than ever before,” Bottom line according to Obama: We are winning the war against ISIS.

I mention this because just two days later on June 16, the Director of the Central Intelligence Agency (CIA), John Brennan, openly disagreed with President Obama’s assessment of our success against ISIS. Testifying before the Senate Intelligence Committee last Thursday, Director Brennan stated:

“Unfortunately, despite all our progress against ISIL on the battlefield and in the financial realm, our efforts have not reduced the group’s terrorism capability and global reach.” [Emphasis added, GDH.]

Director Brennan warned that US efforts to defeat the Islamic State of Iraq and Syria (ISIS) have done little to diminish the threat posed by the terrorist group, and warned that there could be more Orlando-style attacks

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