The chances for a fed rate hike this year are looking a lot better following comments from the central bank. The Fed said that “Near-term risks to the economic outlook have diminished”, which leaves the door open for a hike as soon as September. A lot can happen between now and the next Fed meeting, scheduled for September 20-21st, including a lot of new economic data, but the chances for a near term hike look reasonable. The Fed will also hold its annual Jackson Hole retreat in August, when the market should hear a wealth of hints from those in and close to the Fed. In general, the Fed was much more hawkish this month than last, noting that labor markets had “strengthened”.

FINSUM: We have been saying that the Fed was going to get a lot more hawkish and it appears to have happened. Whether they will actually hike in September is a tough call, but assuming economic data stays strong, we think they will, as we imagine they’d like to get one more hike in before the election in order to give themselves room to cut if things turn downward on a Trump victory.

Source: Barron’s

(New York)

The US pension system has been hanging on by a thread, and now it looks likely to collapse. The system has been underfunded in many areas for years, and now it really looks to be on its last legs. The reason why is terrible returns. Long-term returns for US public pension funds are set to hit their lowest levels ever recorded, creating even more pain for cities and states as the $1 tn funding gap expands. Pensions’ 20-year returns are set to hit just 7.47% once fiscal 2016 results are in, which would be the lowest mark ever recorded. In 2001, at the height of the dotcom boom, the figure hit 12.3%. Pension managers have long said they can make up for a couple of years of bad returns with good long-term performance, so the 20-year return is significant because it shows that returns are actually in systemic decline. With returns so low, the long growing gap might finally need to be addressed as unfunded liabilities are reaching a crushing mass in state and local budgets, such as in Chicago or Connecticut.

FINSUM: The Federal government is probably going to have to step up and address this huge issue. Here is a crazy idea, why doesn’t the Fed shower the US pension system with helicopter money?

Source: Wall Street Journal


This Financial Times article argues that December is the most likely date for the next Fed rate hike. This timeframe is also the market’s consensus and is predicated on the fact that the economy seems to be strengthening, but September feels too soon, and November is hindered by the election, leaving December as a default. In many ways, this path, and markets generally, have mirrored last year’s events. However, in one major way they might be different, according to the piece. That is in Dollar strengthening. Last year the Dollar was on a major bull run, whereas in the past twelve months it has been essentially stagnant. The Fed is now more worried about Dollar strengthening, so the central bank will make sure to keep from talking the Dollar up as it moves towards hiking.

FINSUM: This is pretty plausible actually. The Dollar already seems to be priced with the US as the developed world’s best economy, and a rate hike in the next six months seems to be part of that valuation. If the Dollar doesn’t strengthen much, it will make a rate hike easier for stocks.

Source: Financial Times

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