Be Prepared for a Violent Fed Reversal

The outlook for rates has taken what I call a U-turn. There’s very little doubt that the Fed is on track to raise rates. This outlook is not in response to any particular piece of economic data or the overall economic picture. In fact there are plenty of arguments why the Fed should not raise rates based on economic fundamentals.
However, they have a separate agenda which is that the Fed has committed, what I think will be viewed in hindsight, as a historical blunder by missing the opportunity to raise rates in 2010, 2011, 2012. That was when the economy was growing, not strongly but those were the early stages of the expansion.
The economy was growing well enough then to justify rate increases. If the Fed had normalized rates in 2011-2012, between 2 – 2.5%, they would be in a good position today to cut rates if necessary to fight a recession. Unfortunately they did not do that. They missed an entire cycle while experimenting with Ben Bernanke’s quantitative easing, which in hindsight will turn out to be a real mistake by the Fed.
Now they’re in the position to move rates after the eighth year into the recovery. While this has been a weak recovery, and people are still struggling with part-time employment, or can’t launch careers on top of other difficulties, this recovery technically started in June of 2009. This makes for a very long recession by historic standards. More than twice as long as the average expansion since World War II, and comparable to the very long expansions we’ve had since 1980.

This post was published at Wall Street Examiner on January 12, 2017.