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Fed Rate Fears Are Premature

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Thursday, February 20, 2014

Markets lost ground Wednesday after seeing Fed discussions of potential interest rate increases and we will likely see further follow through on that issue in today’s session as well. While the Fed’s interest rate policy should always be of interest to investors, the more appropriate issue at this stage is the growth outlook for the U.S. economy.   

Minutes of the Fed’s January meeting when the central bank stuck with its Taper plan showed some discussion about interest rate increases. This is something new on the Fed agenda – the last interest rate increase was in the summer of 2006 - but hardly surprising given the small but vocal band of policy hawks on the committee that have all along been against the easy-money policy. The majority of FOMC members, including the new Chairwoman, remain firmly in the dovish camp and see no need for a policy shift for quite some time. Inflation simply isn’t a problem, as this morning’s benign CPI reconfirms.

If anything, the big issue at this stage is whether the ongoing run of soft economic data is solely due to weather or something fundamental is at play there. The FOMC didn’t appear to be in any doubt on that question. But then again, they want to get out of the QE business and may not want to change the Taper plans on account of a modest slowdown from the second-half 2013 growth trend. That said, while the weather explanation is plausible enough at this stage, it is not appropriate to dismiss the growth questions altogether.

Some of the recent data doesn’t seem to be in-sync with the weather explanation. For example, we saw negative revisions to the December and November retail sales data recently when Weather wasn’t problematic and housing starts were weak in the Western parts of the country where weather hasn’t been a problem. Beyond the U.S., there are legitimate questions about the effects of slowdown in the emerging markets on the U.S. outlook. This morning’s soft PMI data out of China further reconfirms that the growth outlook for that country has yet to stabilize.

Bottom line, the issue we should be concerned about isn’t interest rate increases by the Fed, but the growth outlook for the U.S. and global economy.

In corporate news, we have weaker than expected results this morning from Wal-Mart (WMT - Free Report) and Hormel Foods (HRL - Free Report) , while Tesla Motors (TSLA - Free Report) came out swinging in its quarterly release after the close on Wednesday. In other news, Facebook’s (FB - Free Report) purchase of a mobile messaging application maker for what seems like a lot money will be in the headlines. Valuation questions never appear to be big concerns in the social media space, but investors should be asking whether Facebook is overpaying here.

Sheraz Mian
Director of Research

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