The Economic Outlook at Home

August 27, 2015

Our best outlook through this murky fish tank is that we are growing slowly in the US and gradually improving. We see 2.5 to 3 million new, nonfarm payroll jobs a year at an annual rate. We do not see robust and rising wage pressure or strong inflationary forces. We do have extremely low interest rates. All of that is likely to continue.

What does that mean for the Federal Reserve (Fed)? We have seen some mixed rhetoric coming from the Fed. One Fed president says, “We are ready to move in September,” and another says, “I don’t see us ready until at least next year.” Mixed messages coming from a central bank are disruptive and disillusioning to market agents. Markets can handle both good news and bad news. It is mixed news and uncertainty that expand market risk premia and hurt markets as they reprice the probability of outcomes.

Our best guess is that the Fed will hike rates in September, although that expectation has been put to some question as a result of the market movements this week. We do not believe the Fed would alter a policy course because of a currency adjustment in China or because of a falling oil price. The Fed realizes it cannot do anything about the oil price. It creates money, not oil. And the Fed cannot set Chinese currency exchange rates. But, the Fed does worry about asset prices and financial markets.

Now we see a market shock this past week. We do not see credit tightening, except in the high-yield Energy sector. We do not see the elements of a typical bear market such as we had in 2008 or earlier in American stock market history. The Fed examines the history of the currency crisis in 1997 and 1998, but the system has developed insulating qualities now, based upon that experience. The Fed may worry about that historical information, but it is hard to see how such precedents would alter policy based on present conditions.

We believe the Fed will hike before the end of this year, most likely at the September meeting: they have no reason to wait. In fact, waiting would send a message to the markets that members of the Fed were more worried than markets believed them to be. The risk does not lie in the Fed’s implementing a single hike and letting markets reckon with the fact that you can move away from the zero bound and the world will not end. The risk lies in doing nothing.

We expect the Fed to hike to 50 basis points on IOER (interest on excess reserves) before the end of this year. We will learn more when Fed Vice-Chair Stanley Fischer speaks at the Jackson Hole meeting. He has recently been placed on the program after earlier iterations of the program lacked a speech by Chair Yellen. If Yellen were now to speak after not having scheduled an appearance earlier, the markets might roil over uncertainty and the Fed’s attitude. So Fischer now has to carry the message. Clearly, the Fed has decided that a message is needed, and the Fed has selected the Jackson Hole meeting to deliver it.


The ideas and opinions expressed in this blog are those of the author, and they should not be perceived as investment advice or as any other kind of advice.

The preceding is a commentary by Cumberland Advisors and has been reposted with permission. Cumberland Advisors commentaries are available at

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