Stephen Ganden writes: The Federal Reserve decided to keep rates where they were for another month, and indicated that it was only likely to raise rates twice in the next year and four times in 2017.<\/p>\n
The Fed has a history of tricking it self into believing the economy is stronger than it really is.<\/p>\n
The problem is it\u2019s hard to see why the Fed is so confident, not only that the economy will continue to improve, and to do so enough to whether more rate increases, especially when the first rate increase went pretty terribly.<\/p>\n
Despite the falling unemployment rate, there has been little sign of wage increases. Although she said anecdotally there seems to be signs of a pick up in wages. Yellen also sidestepped a question about why consumers haven\u2019t increased spending more given the steep drop in gas prices.<\/p>\n
Does this signal that consumers are still worried about the economy? Yellen said it was really hard to say why consumers were doing what they were doing.<\/p>\n
Also, it\u2019s been 81 months since the end of the last recession, meaning the current economic expansion is due for a downturn. Perhaps, that\u2019s why default rates on a wide rate of debt from auto loans to high-yield corporate debt is rising faster than it has in years.<\/p>\n
Add the risks ahead, which are sure to raise volatility in the market and the economy, including the possibility of England\u2019s \u201cBrexit\u201d from the euro, as well as a contentious election here and it\u2019s hard to see how the Fed will be able to meet its interest rate goals.<\/p>\n
The biggest problem though is overseas. \u00a0Sales of big international companies. will decease because the dollar is likely to strengthen, causing sales of U.S. multinationals to fall further.<\/p>\n
Fed and interest rate hawks will counter that exports only make up a small portion of the overall economy, which is generally still driven by U.S. consumers \u2014 and that the Fed would be better off raising rates now so it has room to lower rates later.<\/p>\n
The international economy means a lot to the largest stocks in the country, and the stocks that make up the S&P 500; more than it used to.<\/p>\n
That\u2019s key because even more than jobs or wages or inflation, perception has the power to drive the economy. As the economy continues to improve, exit polls from the primaries say that the economy remains most voters\u2019 top concern. As long as that remains the case, the Fed\u2019s determination to raise rates is going to remain out of whack with reality.<\/p>\n
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