William McChesney Martin, the longest sitting Federal Reserve Chair in history, once famously quipped that it was the Fed’s job to “take away the punch bowl just as the party” really starts to get going. His point was that the Fed should start raising interest rates and restricting liquidity to preempt an overheating economy before it is too late. The metaphor is a bit dusty since its been over a decade since the Fed has been in a tightening mode, but the “punchbowl” is increasingly relevant again.
Following the first interest rate hike last December, the Fed, acting like shaking in their boots chaperones at a fraternity house party, has appeared overly concerned about the prospect of upsetting the party goers and has completely backed off from earlier indications that it would be raising rates 4 times this year. In mid-March, the Fed not only passed on hiking rates but also issued its new quarterly median projection of the FOMC for the year-end Fed Funds rate. It was lowered by 50 basis points; in effect now saying there will be only two rate hikes over the course of this year. As things stand, rates will remain below 1% for the rest of the year. Fed Chair Janet Yellen’s comments about a very gradual path were reinforced at a recent speech before The Economic Club of New York where she used the word “gradual” 9 times. At this point, traders don’t believe the Federal Funds Rate will hit a full 1% by the end of 2018 . . .