The FED Is Running Out of Excuses, Again

Posted Monday, December 5, 2016 by
Skerdian Meta • 2 min read

The US economic data has been showing improvement since the second quarter of 2016 started, but in the recent months it has picked up pace, same as in Europe and most of the globe. Today´s ISM non-manufacturing PMI numbers were another nail in the coffin for the free money, which has been going on forever. Yes, 2009 seems like a lifetime ago and yes, I´m getting old. 

The headline number came out strong, but the details were even better. The main ISM non-manufacturing number was expected at around 55.4 PMI, but the actual reading for November was 57.2. That´s a nice jump from the previous month, which puts this sector of the economy at a very good place. 

Digging into the fine print, business activity jumped 4 points to 61.7 from 57.7 in the previous month, while employment rose from 53.1 to 58.2. That´s a huge jump for a single month and it will have a positive effect on the total US employment report, but I´m not sure it will be enough to push the wages higher, despite the fact that the vast part of the US workforce works in non-manufacturing businesses. 

The headline says no more excuses for the FED, but it doesn´t refer to the FOMC December meeting because a rate hike in that meeting is as certain as it can ever be in forex. The FED is running out of excuses to tighten their monetary policy further and faster. With a 25 bps interest rate hike a year, it will take about 20 years to get above the 5% level where most of the central banks were sitting before the 2008 GFC (Global Financial Crisis).

Add the improved sentiment since Trump won and the supposedly large fiscal stimulus in the new presidency and the FED has nowhere to hide. If the US economic data keeps improving at this pace and if nothing extraordinary happens (looking at you EU) which might send the financial markets berserk, then 2-3 hikes can easily be absorbed by the US economy.

It would normally mean good times for the Buck, but there are way too many uncertainties ahead, so let´s wait until the FED and the ECB are out of the way in a few weeks.    

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