Raise 12 Times And Call Me In the Morning

Before the last Fed hike, the Market assumed the Fed would be done raising rates next month at 3.5%. However, after reading the Fed statement and the dreaded line "with underlying inflation expected to be contained, the Committee believes that policy accommodation can be removed at a pace that is likely to be measured," the Market is now assuming that the Fed will raise at least two more times. 

Chart Courtesy BullandBearWise.com

The yield curve continues to get flatter and flatter.  While at the beginning of the year, the yield curve  was at an "average steepness" (i.e. neutral), its now definitely moving towards the "restrictive" level.    If the Fed raises rates two more times to 3.75%, the curve will be nearly flat as 10 year rates currently hover around 4%. 

Which begs the question…what economic factors is the Fed examining?  If it really is targeting the real estate bubble, then its going about it all the wrong way.  Fifteen and thirty year mortgage rates have acctually come down since the Fed began raising rates.  I would imagine that most people who are not speculating with short term ARMs could actually refinance their existing mortgage to save money. 

And if the Fed is trying to slow the "strong" economy, it’s aiming at the wrong place.  One of the best leading indicators of a pending economic slowdown was triggered last month when Fed Ex (FDX) pre-announced earnings and mentioned not only that 1) volumes were slowing but that 2) margins were lower as well.  That indicates several things.  First, the lower volumes indicate businesses are opting to send packages via Postal services rather than overnight because they are tightening their belts.  Second, the lower margins indicate that businesses are choosing price over time – i.e. instead of sending a package overnight, they are choosing second day air.  Both are not good signs. 

In addition, the manufacturing ISM survey has come down significantly from earlier in the year. This survey is important because the ISM actually tracks the rate of change in the S&P 500 fairly closely.  While the turn higher is encouraging, the trend is still clearly down. 

Chart Courtesy BullandBearWise.com

So it seems to me that the Fed is looking in the rear view mirror rather than forward in making its policy decisions.  And whenever the Fed does that, things blow up.