Guessing Games Are Every Economist’s Cup of Tea

cups of hot coffee on gray background

Macro Commentary

It seems that guessing games are every economist’s cup of tea these days.  With no more information than anyone else, opinions abound on the probability of the next interest rate increase by the US Federal Reserve.  The Fed Funds futures market is implying an approximate 1/3rd chance of action in late September which is up from a near zero percent chance a month ago.  Meanwhile we have seen guesses ranging from no action to a 55% chance of a rate hike.  How exactly do you calculate a 55% chance of a rate hike?  All the speculation is coming from reading the tea leaves left in comments by various Fed decision-makers intimating that September is not off the table.  Consider though that the Fed Chairwoman Janet Yellen has been consistent in saying the Committee is “data dependent” but the data has not exactly been screaming for additional action.  Yes, the unemployment remains around 4.9% which is relatively low but the increase in jobs month-over-month is still a paltry 151,000 and wage growth is stable but not extended.  If they hike in September, the question will be “what did they see in the data?”  In our opinion, it is the Fed messaging that matters most.  The markets are trying to figure out the pace and magnitude of the trajectory of action.  Another 0.25% of an interest rate increase by itself should not have a major economic impact, but the concern will be whether this is the start of a steepening trend.  We have no better information than anyone else on this issue, but it certainly feels like the Fed waits in September and has a higher chance in December for no other reason than the symmetry of action (the last hike was in December last year) which the market can easily interpret as slow and steady.  Our tea will be steeping as we wait and watch.

 

THE OPINIONS EXPRESSED HEREIN ARE THOSE OF EDGE CAPITAL PARTNERS (“EDGE”) AND THE REPORT IS NOT MEANT AS LEGAL, TAX OR FINANCIAL ADVICE. THE PROJECTIONS OR OTHER INFORMATION GENERATED BY THIS REPORT REGARDING THE LIKELIHOOD OF VARIOUS INVESTMENT OUTCOMES ARE HYPOTHETICAL IN NATURE, DO NOT REFLECT ACTUAL INVESTMENT RESULTS AND ARE NOT GUARANTEES OF FUTURE RESULTS. YOU SHOULD CONSULT YOUR OWN PROFESSIONAL ADVISORS AS TO THE LEGAL, TAX, OR OTHER MATTERS RELEVANT TO THE SUITABILITY OF POTENTIAL INVESTMENTS. THE EXTERNAL DATA PRESENTED IN THIS REPORT HAVE BEEN OBTAINED FROM INDEPENDENT SOURCES (AS NOTED) AND ARE BELIEVED TO BE ACCURATE, BUT NO INDEPENDENT VERIFICATION HAS BEEN MADE AND ACCURACY IS NOT GUARANTEED.