Just a week ago it seemed that world economists were doing their best to provide any and every reason possible to discourage the United States Federal Reserve from raising interest rates at least anytime within the balance of 2015 and even well into 2016. The consensus from these groups and various individuals was the fledgling world economic recovery was just too fragile to upset, particularly with the recent slowdown in the Chinese economy, and that the US should risk inflation edging higher at home for the sake of the greater global good (ggg). Considering that the current leadership at the Fed tends to lean to the dovish side of monetary policy, I was beginning to believe that Chairperson Yellen and crew may be persuaded to keep the finger off the trigger for a while longer. Yet gauging from comments that she and other Fed officials made this past week, it would appear that not only are they ready to squeeze the trigger, it sounds as if the hammer is already pulled back into the fire position.
As we have discussed in previous letters, the U.S. has seen a series of positive economic releases over the past few months with GDP climbing back from the disastrous 1st quarter and unemployment dipping down to target levels that the Fed would maintain are at or close to full employment. The missing link has been signs that inflation is on the increase but that trepidation was at least partially allayed this past week. The June CPI numbers were released and indicated that prices rose a seasonally adjusted .3% from the previous month. While understandably that does not sound like much of a change, it was the first time this year we witnessed an increase over the prior year and takes the core number up to 1.8% which is right in the target zone. Recognize as well that this is in spite of the U.S. Dollar being over 20% higher than it was a year ago at this time, meaning the price of many imported goods are lower. Food prices were up .3% over last month but the majority of that increase was due to the fact that eggs jumped 18.3% for the month.
Also released this past week were the June Housing starts, which were up 9.8% over the previous month. One needs to note that, unlike the heady days before 2007 when we could not build single family homes fast enough, the growth in that segment, which represents 2/3rd of the market remains flat to lower and it is the construction of multifamily housing the fuels the expansion. Construction of apartments, condos and other multifamily dwellings was up 29.4%.
This past week I had the opportunity to attend the annual Agricultural Symposium at the Federal Reserve Bank of Kansas City where one of the speakers was bank president, Esther George. While not a voting member this year, she still has a voice in the debate at the Fed table and at this meeting outlined the reasons why she is, and realistically has been for some time, a proponent for a hike in rates at the September meeting. Additionally, on Wednesday of this week Janet Yellen presented the semiannual monetary policy report to Congress and after pointing out all the improvements being witnessed in the economy and in employment trends, came as close to stating rates will be increased at the next meeting as she ever has.
As I have pointed out in previous newsletters, for some time we have believed that a raise in rates was long overdue as it would appear that the existing policy was doing little more than accelerating the rate at which corporations were buying back shares and fostering M&A activity as well as exposing us to a more dramatic boost if inflation reared its head unexpectedly. It seems we will find out relatively soon what the impact of higher rates will be. I have to believe that at least for much of the economy, there will be no ill affect. There could be one exception-those of us in commodities. Higher rates should provide extra stimulus for the dollar, and as we are already struggling to remain competitive in the world export market, that may not be welcome news.
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**The views expressed above are entirely those of the author.