July 27, 2022

Higher Interest Rates? Sure, Just Ignore The Messy Details

When you launch a ship, you hope for calm seas. When your plane takes off, you hope for fair skies.

So it is for the Federal Reserve today, as they continue on their current course of raising interest rates and thereby tightening monetary conditions. This new course that the Fed has set began just over four months ago, when in March, the Fed, for the first time since the Economic Lock-down, decided to raise the rate. And like the passengers of our financial ship, we’re all invited along for this economic journey.

They showed that they had some conviction that they were heading in the right direction. On that first step, the Fed took rates up only 25 basis points — a tentative move. Next, the central bank took rates up 50 basis points, and most recently, just last month, they raised rates by 75 basis points.

It is becoming increasingly apparent that the Fed is fully committed to its battle against inflation. And they are more than willing to use their most potent monetary weapon, interest rates. In the minutes of that June meeting, the committee indicated that they thought another 75 basis point boost was in order.

Like the ship captain or the plane’s pilot, the Fed and the majority of Wall Street believe it’s fair weather that the economy can easily overcome any adverse effects from this monetary tightening.

So, let’s take a look at the most commonly watched measures of the economy and how they have changed over the past month since last the Fed met.

There have been 16 such reports released over the last month, and I think you’ll agree that these reports present a very different picture than you’re likely to hear from the mainstream media or our leaders in Washington.

First off was that inflation report, and needless to say, it has everyone concerned. Inflation is problem number one in the economy. We’ll all agree. However, we may disagree on its cause. As you know, I pin the cause of inflation primarily on Biden’s energy policy, as we discussed yesterday.

But for now, let’s stipulate that inflation is a significant headache, and we’ll move on from there.

In the last month, four measures of the economy have improved. Those four are Durable Goods Orders, although this report was from May. We’ll see June’s news today. Also positive was Retail Sales, the Balance of Trade for May, and the Michigan Survey of Consumer Confidence. Although the Conference Board’s Survey just released yesterday was negative.

And that was it: four positive reports, a couple with reservations.

Nine reports declined over the past month. Those reporting lower levels were: Personal Spending, The ISM measure of the Purchasing Managers Index, both manufacturing and nonmanufacturing, the JOLTS Report of Job openings, and Non-Farm Payrolls.

And then we come to the sector that looks to be getting hit the hardest from higher interest rates: the Real Estate Sector. There have been four reports on Real Estate: Building Permits, Housing Starts, Existing Home Sales, and New Home Sales. All were down. And all were reported within the past week.

Now, none of this is likely to dissuade the Fed. The Fed course is likely already set. Some on the Fed will stick to their guns for purely political reasons. Believing that they would lose all credibility if they reversed course now.

While there are probably others on the Fed, and I am speculating here, that do believe that the economy is strong enough to withstand these higher interest rates. I am aware of many on Wall Street who feel this is a strong economy.

Making this all the more suspenseful is that both the final interest rate decision, and the first measure of the overall economy for the second quarter, come within a day. First, at 2 pm this afternoon, the Interest Rate Decision will be flashed across the internet. Then at 8:30 am tomorrow, The Bureau of Economic Analysis will also announce the first estimate of the nation’s GDP.

Interest Rates and GDP this is as close to high drama as the dismal science of economics is likely to see.

So, for those who may be keeping score: the Street believes that the Fed will raise interest rates by 75 basis points, 3/4%. And that the economy grew by 1/2%.

I don’t know what the betting is in Las Vegas, but I think I’d take the under.

Economic News

In overnight economic news: German consumer confidence hit a record low. As the news was released that yet another turbine on the Nord Stream Pipeline would need repair. The Nord Stream Pipeline, as you know, supplies oil and gas from Russia to Germany, And is their principal source of energy, particularly in those cold German winters. This is one more indication that the global supply chain continues to break down.

Here in the US, the big news, of course, will be the announcement at 2 pm this afternoon of the Fed’s interest rate decision. Wall Street believes that the Fed will raise rates by three-quarters percent.

But before we get there, we’ll receive a couple of last-minute reports that will give us insight into just how strong the economy is. First Durable Goods Orders are the major capital purchases a business makes in anticipation of future growth. Also, reporting will be pending home sales, sales that are in escrow.

Both will give a flavor of how optimistic people are, as both represent a major financial obligation.

In earnings so far this morning, we’ve had positive results from cell phone company T Mobile and aircraft manufacturer Boeing. Not so positive from drug maker Bristol-Myers Squib.

Then later this afternoon, Meta, the former Facebook and tech company Qualcomm, will announce the results.

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