Home   Logon   Mobile Site   Research and Commentary   About Us   Call 1.800.621.1675 or Email Us       Follow Us: 

Search by Ticker, Keyword or CUSIP       

Blog Home
   Brian Wesbury
Chief Economist
Click for Bio
Follow Brian on Twitter Follow Brian on LinkedIn View Videos on YouTube
   Bob Stein
Deputy Chief Economist
Click for Bio
Follow Bob on Twitter Follow Bob on LinkedIn View Videos on YouTube
  Fed Has Less Patience For ZIRP
Posted Under: Government • Markets • Monday Morning Outlook • Fed Reserve • Stocks
Economic data will have something for everyone this week. The ISM reports (manufacturing and non-manufacturing) will likely be held down by unusually harsh weather and the Port closures. But, autos sales should remain strong and January jobs data are set for a gain close to 250,000.

Anyone who understands the Plow Horse economy is used to this schizophrenic data and won't get swayed either way. Growth continues, and with it, the Federal Reserve should continue on its path to normalizing monetary policy. At its next meeting on March 18th, the reference to being "patient" before raising rates should be removed. Fed Chair Janet Yellen signaled this last week in testimony to Congress, noting that removing "patient" in March wouldn't automatically trigger rate hikes. This is exactly what you'd expect her to say when the Fed is preparing to remove that language.

Yet, we think the Fed will raise rates in June, ending its Zero Interest Rate Policy (ZIRP). Yellen focuses on jobs and her testimony last week led off with an upbeat assessment of employment. Meanwhile, Yellen's right-hand man, Stanley Fischer, the Fed's Vice-Chair is saying financial markets are underestimating the amount of rate hikes over the next few years. We doubt Fischer would say this unless there was a Fed consensus in favor of hikes starting relatively soon.

We expect gradualism in the early stages of any rate hike cycle. Under Greenspan and Bernanke, rates rose by 25 basis points at every meeting from mid-2004 through mid-2006. This time we expect a rate hike of 25 bps at every other meeting. This kind of gradualism will make it easier to overcome dovish objections about a June move.

Starting in June and then moving very gradually – rather than waiting longer but moving faster once rate hikes start – would also give the Fed the chance to test out its new system for lifting rates in an era of bloated balance sheets, using the interest it pays banks on reserves as well as reverse repos. Right now, no one knows for sure if the system will work as planned, and that includes the Fed itself.

Assuming it does, we aren't worried about how the initial phase of rate hikes will impact the economy or equity markets. It would take a federal funds rate of 3%, or above, to slow the economy. Until then, the Fed won't be tight, just less loose. Plow Horse growth and rising stock prices haven't depended on QE and ZIRP. Ending these policies won't alter our outlook.

Click here for PDF version
Posted on Monday, March 2, 2015 @ 10:48 AM • Post Link Share: 
Print this post Printer Friendly

These posts were prepared by First Trust Advisors L.P., and reflect the current opinion of the authors. They are based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
The information presented is not intended to constitute an investment recommendation for, or advice to, any specific person. By providing this information, First Trust is not undertaking to give advice in any fiduciary capacity within the meaning of ERISA, the Internal Revenue Code or any other regulatory framework. Financial professionals are responsible for evaluating investment risks independently and for exercising independent judgment in determining whether investments are appropriate for their clients.
First Trust Portfolios L.P.  Member SIPC and FINRA. (Form CRS)   •  First Trust Advisors L.P. (Form CRS)
Home |  Important Legal Information |  Privacy Policy |  California Privacy Policy |  Business Continuity Plan |  FINRA BrokerCheck
Copyright © 2022 All rights reserved.