Many analysts have been talking about the impending rise in the Fed Funds Rate, as the current Federal Reserve Policy is ZIRP, or zero interest rate policy, an extreme accommodation that has been in place for more than five years. Naturally, the Fed has been overly cautious and careful not to rock the boat. They have also told us the policy has been “data dependent.” Nevertheless, the decision to raise rates, when it comes, will be a relief to some and a worry to others.
Trying to game the markets, the economy, and the Fed is a tedious exercise, which in the past has meant “wrong-way action.” With this very transparent Fed, why bother trying to guess? With the strong jobs number last week and some decent data, it appears the Fed is on track to start normalizing rates again in 2015. Should we be fearing this move? No.
Removing the accommodation might be a good thing, as it signals the markets and the world that the U.S. economy is back on track and no longer in need of monetary assistance. There was no panic when the Fed tapered its bond buying this year, and now that bond buying is complete, th markets have not flinched. In the past, a tightening was considered a negative series of events, but it was mostly done to combat inflationary flames. We’re not seeing that this time around.
When the Fed raises rates to combat inflation, it is usually done in a series of strokes. The Committee are “gradualists” by nature, realizing their activities/adjustments take months to kick in. Given the length of a highly accommodative Federal Reserve Policy, it stands to reason they will take a slow and gradual approach once again with the removal of policy.
Back to the strong jobs number for a moment. Last week’s surge of 321,000 new jobs had lifted some spirits, but it left much to be desired for the markets. So, with the Fed’s desire for gradualness, does this one report mean they are in a panic to raise rates? Hardly so, but given the encouraging data, the economy is on the right track. They’ll wait to see more evidence, but a good report has positive ramifications, like a stronger greenback.
That brings me to my next point. Much has been said about the possibility of a strengthening dollar having a negative effect on our multinational firms and exporters. Yet a strong currency is indicative of a strong economy, and I’ll take that any day. Currency issues for corporations are simply a check/balance procedure. Companies that improve efficiency and productivity will benefit from a strong currency, regardless of the short-term noise.
So, let’s worry less about how the Fed is going to act and more about how the economy is going to perform in the year ahead. They are saying it could be a good year, and with less accommodation, there will be less to worry about.
