Earlier this week it seemed that the market might finally have a reason to believe the Fed might pause its inexorable march higher in rates. That reason was that inflation had dipped below the Fed’s target. Being just a single occurrence, it was a weak-footed hope. Now, new data shows the American consumer is doing well, as retail sales jumped 0.9% in November. The explanation for the jump is that a drop in gasoline prices helped fuel more retail spending.
FINSUM: Consumers are obviously still feeling comfortable, which will give the Fed a bit of comfort about the stage of the cycle.
The moment many investors have been waiting for (or not, depending on how you look at it) has arrived. Rate hikes finally have a chance to slow after their steady rise over the last couple of years. New inflation data has come in showing weakness. Inflation has now fallen below the Fed’s 2% rate, which means the central bank has cause to pause its rate hikes as the economy looks to be on more fragile footing.
FINSUM: There are two ways to look at this. The first is that it takes some momentum away from the current yield inversion. But on the other hand, it could be an indicator that the economy is headed towards recession.
Jack Bogle, the founder of Vanguard, is a legendary name is investing. Not only did he found and grow one of the largest asset managers in the world, but he has a habit of being right when he predicts returns. Well, he has just made another prediction, and unfortunately it is not one investors will like. He thinks returns over the next decade are going to lag their historical levels badly. His forecast is that investors can expect a 1.75% net return with a 50%/50% stock-bond portfolio over the next decade.
FINSUM: If this call turns out to be right, it will have huge implications for retirees and pension funds, as “safe spending” rules and total returns for pensions will be devastated. That sad, we think forecasting that far out is all but useless.
Few would argue that the tax cut passed in late 2017 was one of the main drivers of the strong economy we saw this year. Corporate earnings have been stellar, the economy is expanding at a good clip, and the labor market is tight. However, the IRS looks about to undermine the benefit of the tax cuts. The agency just announced a new policy for 2019 regarding how it accounts for inflation. The move will undermine much of the value of the tax cuts by raising tax bills for almost all Americans. The new policy will increase tax revenue for the government by $133.5 bn over the next decade.
FINSUM: This is the kind of policy that is going to hurt more over time. That said, the current deficit is huge, so from a fiscal responsibility view it is hard to argue this is unnecessary.
Investors can breathe a sigh of relief, but only for a moment, as it looks unlikely that the Fed will hike again in its next meeting this week. The Fed will not be releasing updated projections after this meeting. That said, improvements in the labor market recently make it likely that the central bank will hike rates at its meeting next month. The Fed is supposed to discuss this week all the things you might expect: “the economy, financial markets, and the future path of rates”, according to the WSJ. Fed chairman Powell will not be holding a press conference after the meeting.
FINSUM: This Fed is so hawkish and the economy is rolling so well that even a month’s break from hikes seems like a reprieve. We are a long way from 2013.