Last week was all about earnings. This week all investors need to watch the Fed. There is a lot going on with the Fed as Janet Yellen and the Fed governors will be meeting in Jackson Hole, Wyoming. Some new information has come out recently that points toward December as the next time we could see the Fed raise interest rates. Yellen could come out this week with the news that it could be as early as September.
- Housing continues to be a strong point in the economy. There is a report coming out tomorrow that the housing industry could be on an eight year high.
- The Fed inflation target is 2%, which we are very close to.
- The job numbers continue to be trending in the right direction.
- The Bank of England has lowered their interest rates which could throw off the currency wars.
Janet Yellen and the Fed are walking a narrow path as they really cannot lower rates any more. Looking back to the 1980’s we see there have been four economic downturns before the one in 2008. Each time the Fed had enough room to cut interest rates by 5% or more. They didn’t do it all at once but they gradually got there. Now, in the world of quantitative easing, we don’t have as much room to go down. The only tools the Fed has now is another round of quantitative easing or negative interest rates. That has not gone over well in Japan so this is highly unlikely for the Fed.
We believe the Fed may be looking for some fiscal policy help. Combining monetary policy from the Fed with fiscal policy in the form of government spending creates a powerful tool. Stan Fisher, the number two leader of the Fed, over the weekend said that he would like to see some fiscal policies in tax reform, infrastructure spending, and other things that will push the economy forward.
This is the new norm and we are seeing a lot of discussion because the Fed and the government are still getting use to it. Remember, when the Fed raised rates last December, January became one of the worst on record.
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