The Federal Reserve needs to admit it made a mistake signaling all through 2015 that it intended to raise interest rates, then finally pulling the trigger in December. The philosophical desire to end extraordinary measures and return to normalcy is what is driving Fed decision making. Because if the Fed were looking at the data they would be talking about easing, not tightening.
A year ago, I wrote Oil Is The Deflationary Canary In The Coal Mine. The article focused on the rapid plunge in oil prices and contemplated the possibility that it was foreshadowing a slowing economy and a deflationary environment. Fast forward a year and a few days after the Fed raised rates: The markets stopped focusing on the Fed and started focusing on the economy. The result is that global stock markets are off to their worst start since The Great Depression.
A year ago, I was very concerned when oil traded below $50 per barrel. It ended last week at $29 per barrel. This is below the cost of production even for OPEC members like Nigeria. Oil markets are indicating less demand in the future. The price is way too low to be indicating growing supply.
China is officially acknowledging its economy is slowing. Their government announced "official" GDP grew at 6.9%, which is the slowest rate of growth in 25 years. Importantly, China is forecasting 2016 is going to be a tough year. Whether the government decides to try and massively stimulate the economy or let it rise and fall on its own is an open question. When The Great Recession hit, China stepped in with a larger stimulus plan than the one enacted in the U.S. China's dilemma is it doesn't need new construction and isn't sure how to transition to a different economic model. This is adding fuel to global uncertainty.
The Fed has misread the economic picture in the U.S. Friday delivered nothing but news that the Fed needs to help the economy. Retail Sales fell 0.1% for December. The 2.1% total gain for retail sales in 2015 was the slowest rate of growth since 2009. The Empire Manufacturing Index, an indicator of New York area manufacturing, showed a -19.37 contraction, which is also the lowest reading since 2009. Finally, the Producer Price Index fell 0.2% and for the year showed a price decline of 1%. Even when food and energy prices are stripped out, producer prices only rose by .3% for the year. That's hardly an overheating inflationary environment!
But if that wasn't enough, Wal-Mart (NYSE:WMT) announced the closing of 269 stores and lowered expectations going forward. Wal-Mart is only confirming what the retail sales report has shown - that economic activity is slowing. Macy's (NYSE:M) has also reported a tough environment for retailers.
One of the movies up for Best Picture is "The Big Short." It is a movie focused on the mortgage-backed securities crisis that led directly to The Great Recession. The big banks like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), and Citibank (NYSE:C) were all caught flatfooted when the crisis hit. The Federal Reserve was also out to lunch. The Fed was forced to call an interim meeting to start rapidly cutting rates in the summer of 2007. The merits and exact accurateness of the movie is not the point. The fact that what should have seemed obvious at the time was not obvious to many experts, including the members of the Federal Reserve Board.
Today, we have slowing global economic growth, slowing U.S. economic growth, and slowing inflationary pressures. Now add the collapse in commodity prices headlined by oil. The fracking boom in U.S. oil shale created more high-paying jobs than any other U.S. industry since the end of The Great Recession. Those jobs have been shredded with the collapse in oil prices. It seems obvious to me the Federal Reserve is heading in the wrong direction and needs to stimulate economic growth. The question is when will it seem obvious to the Fed?
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I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.