By: Kent Engelke | Capitol Securities
It is widely expected the FOMC will increase interest rates by 0.25%, the second increase of the year. It is also anticipated “guidance” will suggest another 0.25% increase is forthcoming by year end.
I am certain there will be stories that monetary policy is tightening, that such increases are not warranted in today’s environment. I do not ascribe to this view.
I believe monetary conditions are still extremely “loose” given that excess bank reserves are gargantuan. Moreover, until the Fed drains these reserves from the system or until the central bank lifts the rates over the rate banks are able to lend these funds, conditions will remain “loose.”
Regarding inflation, year over year CPI is 2.0%. Excluding food and energy, the CPI is up 1.9%. This is up from 1.0% for the year ended May 2016. Generally speaking, the overnight rate is around the inflation rate.
Additionally, wage inflation is also accelerating at either end of the spectrum. There are a number of states mandating an increase in minimum wage. On the other end of the scale, there is considerable wage inflation in the STEM and trade industries.
About a month ago, I put forward a possible scenario that August 2017 could be the inverse of August 2008. The Federal Reserve shifted direction radically two weeks following a Fed meeting and uncharacteristically lowered the discount rate in a rare intermeeting move, stating risks on the downside vastly dwarfs risks on the upside.
Can the inverse occur in August 2017? If monetary velocity or the turnover of money accelerates sharply, the inverse can occur.
The announcement and post meeting statement will occur around 2:00 pm.
Last night the foreign markets were up. London was up 0.53%, Paris was up 0.71% and Frankfurt was up 0.96%. China was down 0.73%, Japan was down 0.08% and Hang Sang was up 0.09%.
The Dow should open steady ahead of the Fed. The 10-year is up 1/32 to yield 2.20%.