Tags: consumer confidence | Federal Reserve | Brexit | Trump

Consumer Confidence Masks Uncertainty on Fed, Brexit, Trump Agenda

Consumer Confidence Masks Uncertainty on Fed, Brexit, Trump Agenda

By    |   Tuesday, 28 March 2017 11:31 AM

Three Fed Presidents gave yesterday interesting comments on how they see the Fed’s path on interest rates this year.

Chicago Fed President Charles Evans said he saw three rate hikes in 2017 as ‘plausible’ while adding that two or four increases were also a possibility stating: “I don't see the data, I don't have the confidence ... If I thought that I was inclined to four rate hikes for 2017 I would presumably be seeing a much stronger lift in inflation, I think it would be accompanied by a meaningful increase in long term inflation expectations.”

From his side, Chicago Fed President Charles Evans said on Bloomberg TV: “To the extent that I gain more confidence in the forecast I have, that would be a good indicator that I could perhaps support three. Two might be the right number if there’s a little bit more uncertainty.”

Dallas Federal President Robert Kaplan said he would support further interest rate hikes if the U.S. economy takes more steps toward reaching the Fed’s goals of full employment and 2 percent inflation, and that he wanted the Fed to move gradually and patiently. Interestingly, when talking about the US debt position he commented, we’ve got to be really thoughtful about things that might increase debt to GDP. Once the Fed has raised rates a bit further, it will need to start shrinking its massive balance sheet by allowing maturing mortgage-backed securities and Treasurys to run off.

So, interest rates are bound to go up further for the foreseeable future and, among other things, that will not be of great help to the home-building industry and U.S. home-ownership that, according to the Rosen Consulting Group, is close to 50-year lows.

Homeownership rate stood at 63.7 percent in Q4 of 2016, according to the US Census Bureau. That was down from a high of 69.2 percent during the housing boom and below the 65 percent economists say is a normal level.

Which is not often mentioned is that this situation is part of the reasons for the U.S. economy’s sluggish recovery from the last Great 19-month Recession that began in December 2007 and ended in June 2009. As a reminder, the Great Recession was directly related to the financial crisis of 2007–08 and the U.S. subprime mortgage crisis of 2007–09.

Today’s 16-year high reading for the Conference Board U.S. Consumer Confidence Survey, which is a reputable opinion poll of U.S. consumer sentiment, should better be taken with caution as sentiments will have been subject to as well as to political noise as economic reality.

Nevertheless, and given that there is some kind of relationship between sentiment, the economy and politics, and given that the relationship may work both ways, investors could do well taking a short look at these data. 

For the moment, of course, there is quite a lot of political noise in the United States.

The Trumpcare failure over the weekend is too recent to be covered by this survey, but the general sense of disquiet that is evident in the rather low approval ratings of President Trump that now stands at 36 percent may be reflected in the consumer confidence data today.

On the other hand, the strength of the U.S. labor market is an offsetting factor as to the fact that pay increases have broadened out to include the lower skilled in US society.

Besides all that, historically spoken, today marks the last day that the United Kingdom (UK) is a member of the European Union (EU) without having served noticed divorce, there is a fair amount of chatter about the prospects for the UK’s exit (Brexit) negotiations.

The Financial Times has been reporting that Germany, which is traditionally an economic ally of the UK within the EU, may be taking a harder stance toward the treatment of the UK in the divorce proceedings.

The story is not, perhaps, important as to its content. There is a long way to go with the negotiations.

It’s more important as an indication as to what lies ahead.

One should not forget that 27 countries must agree to the terms of the UK exit and the demands of any one country would be a potential block to the deal.

If a Prime Minister no one has ever heard of insists that the UK supports their country in the next 5 years’ Eurovision song contests as their price for the deal, then that’s what could happen.

No doubt that financial markets will be subject to volatility on random newspapers’ articles and random political statements and investors in the U.S. as everywhere else should better be aware of this. It’s not always what happens at home that matters most…

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Three Fed Presidents gave yesterday interesting comments on how they see the Fed's path on interest rates this year.Chicago Fed President Charles Evans said he saw three rate hikes in 2017 as 'plausible' while adding that two or four increases were also a possibility...
consumer confidence, Federal Reserve, Brexit, Trump
Tuesday, 28 March 2017 11:31 AM
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