This morning we had a lot of debate on whether or not the Fed model is broken. The Fed model uses a lot of indicators and data to determine whether or not to raise or lower rates. Meanwhile, everybody is on standby. We still believe the Fed won’t do anything in September but it could happen in December.
The data is problematic
One area where we believe the Fed model is broken is in the problematic employment data. Unemployment is at about 4.9%, which is where the Fed model would normally cause them to raise interest rates. In the 60s and 70s, the Fed kept interest rates low and inflation got away from them. They do not want to make those mistakes again but the world is a lot different now in 2016.
The need for different data
We are constantly looking at, not only at what everyone else is looking at, but also at what is different. It’s there that we are looking for what could impact or blindside us. While the media is focusing on the old way of looking at the data, there is other data we should be considering. The common economic reports that the Fed model looks at is GDP and housing. If you look under the hood, there is some weakness there that might give the Fed pause in September. One specific report they are looking at is the Supply Management Services Gauge. That encompasses healthcare, transportation, and financial services, which is at a six year low. This gauge was a leading indicator in 2008 so it is vital data now.
Japan has the important meeting
The Japanese population is ahead of us in changing demographics, such as the aging populations and distribution of assets. The Bank of Japan meeting this week is a very important meeting. It’s more important than everyone thinks. They are in much worse shape than the United States and they are at the forefront in using unheard of monetary and fiscal policy to try and boost their growth. They have run out of traditional solutions and whatever they do will be more unexpected and impactful on things, such as the long end of the yield curve. Where our Fed is still trying to play on the edges of the markets, Japan is attempting things that directly affect them.
Investors need to stay focused
The time period we are in is unprecedented. Both presidential candidates are tied in the poles and we have a Fed scenario that we have never faced before. But where there is chaos, there is opportunity. Investors should not let the Fed and the election be the shiny objects that distract their attention. At the end of the day, it’s all about the corporate earnings, the growth in the economy, how technology is advancing, and what the consumer is spending money on. We are looking at all of this as well as the shiny objects.
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Fi Plan Partners is an independent investment firm in Birmingham, AL, serving clients across the nation through financial planning, wealth management and business consulting. Fi Plan Partners creates strategies in the best interest of their clients using both fee based investing and transactional investing.
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