Tags: Federal Reserve | rate | hike | economy

Fed Watchers Say Yellen Is 'Very Cautious' About Rate Hike

By    |   Thursday, 02 July 2015 07:45 AM

J. J. Kinahan, managing director at TD Ameritrade, noted that sales of consumer and durable goods have been weak, so he thinks the Federal Reserve has been “waiting for the consumer to show up” before taking action to raise interest rates. He thinks there is already a “great” trend in employment, pointing to the hospitality industry as a strong sector in light of the strong dollar. Kinahan also expects consumers to “move up the chain,” from Wal-Mart to Macy’s to Nordstrom as they get more confident about the economy. Thus, “Raising rates, in my opinion, will become a vote of confidence.” In response to a question about whether higher rates would dampen consumer spending, Kinahan cited action by the markets to raise rates on their own. He concluded that ¼ point is not a big move, and expects one or two by the end of the year.

Rene Nourse, principal and managing director of Urban Wealth Management, thinks the Fed is going to feel pressure to raise rates in September as evidence grows of wage increases, beginning with low- end workers, but she added that given the difficult recovery, the Fed has to be “very cautious about when they’re going to flip that switch,” because a rate hike will “ripple” through global economies.” An interviewer noted the Executive action to raise overtime pay for mid-level employees and asked whether this wouldn’t be “a real burden” for small- and medium-size companies. Nourse responded by using Los Angeles as an example of a city that has raised wages but that the action will take effect over five years to provide a “badly, long-overdue living wage,” also necessary for employers “to keep good personnel.” Nourse predicted that the Dow will reach 20,000 by the end of the year based on strong earnings and M&A activity. This writer would remind readers that there are also strong pressures, including from the IMF, tending to stay Fed action, with Chair Janet Yellen herself raising the possibility of waiting until March 2016.

Looking beyond Greece to other areas of weakness, Michael Kurtz, Global Head of Equity Strategy at Nomura, found a “wake-up call” in a 25 percent interest rate cut by the Peoples Bank of China (PBOC), and he said action was needed from the authorities, including its decision to allow margin financing, “to signal that’s it’s okay to get back in the water again.” He called the Chinese “desperate” to keep its IPO channel moving over the next couple of years to deleverage the economy by increasing equity, and the interviewer referred to encouragement from the premier for Chinese investors to buy stocks. Both she and Kurtz emphasized that retail investors, who comprise 80 percent of the market, know that the authoritarian government always gets its way. He expects a stronger economy and favorable earnings guidance to lift the market. This writer would note the irony of referring to China as an authoritarian regime that is sponsoring equities in light of the strong and brazen support of equity markets by U.S. authorities.

Finally, Keith Hausman, of Oxford Advisors, responded to a question about the Puerto Rican “debt bomb” by ovserving that negotiations with creditors have been extended to September 15 and that bond insurers have contributed more than $100 million to the pending deal. He called the Electric Power Authority “the tip of the iceberg,” with $65 billion more of debt to be restructured, a process Hausman expects to take many years. CNBC’s Bill Griffeth remarked that, “Bond insurers have already taken a haircut, big time.” With various PR issues in the 40s to 60s, Hausman recommends that investors hold on if they can. This writer wonders whether these bonds might ultimately be redeemed through the Yellen put.

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J. J. Kinahan, managing director at TD Ameritrade, noted that sales of consumer and durable goods have been weak, so he thinks the Federal Reserve has been "waiting for the consumer to show up" before taking action to raise interest rates.
Federal Reserve, rate, hike, economy
Thursday, 02 July 2015 07:45 AM
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