A New Era?
After hours of deliberation, the FOMC committee emerged exhausted. It had been six hours since the beginning of what some called "the changing of an era in monetary policy." The governors now stood aside and below their public leader, Janet Yellen, as her dreary eyes blinked in front of the long-awaited press conference to announce a change in the Federal Funds rate of .25%. That's right, the price of money just recently increased from 0%-.25% to .25%-.50%, a move that left the financial sector groaning and the world, wary of overheating, applauding. In at least one article, the words "day of reckoning" were used to describe the fateful day as if they were just assembled to discuss plans for the necessary destruction of the all-powerful Ring. The Federal Reserve, known for its beaucratic leisure and quiet nature, was made out to be game-changing where suddenly Yellen has decided the fate of the economy. Arguments still exist for no rate hikes but quickly become swept away by the fervor of the new period of economics.A little gaudy, no? I, for one, am tired of the headlines this policy change has garnered as if the markets truly shifted the second the words "quarter point increase" came from Yellen's mouth. Investors, firms, and consumers had already adjusted their expectations to account for this transformation. This can be observed through the flattening of consumer spending and an increase in saving.
Years and years of ZIRP policy attempted to stimulate consumers to spend more so that GDP would grow more streneously. This occurred for a while after the financial crisis, but it soon began to slow down. Another characteristic of ZIRP policy is a decrease in the savings rate of the general population. Because savings accounts don't yield as much, consumers are less likely to put their money away because it has more value in their wallet. The relatively flat trend of savings rate growth has finally reversed to beat the previous peak of the beginning of this year. During that same period, consumer expenditure begins to soften depite its tendency to accelerate during the winter months. Are people spending less on Christmas? Or were rate hikes expected?
The same here can be said for corporate expenditures and savings. The buzzsaw movement that defines the monthly trend of capital expenditures with a negative trend showing a steady decline of the statistic over time. Firms tend to spend less when borrowing money gets more expensive or it's expected to get more expensive. Look at the drop in the beginning of 2014, here marks a new period where oscillation slowly drops off and highs get lower. During that same period, cash and cash equivalents of domestic firms begins its spike into 2015. The timing of these reversals show that expectations of firms had changed well before late this year. The analysis of these indicators could have helped the Federal Reserve notice that. Low inflation is a cause of these consumers and businesses that are adjusting for the increase in borrowing costs. If there's a reason to be surprised at the timing of this rate hike, it should be that it came so late. There's no need to pump up the importance of such a move in fancy headlines and boisterous calls of the end of an era. That end came about when expectations changed. Just look at the market's response to the move. Green numbers lead a positive rebound off of an unstable energy loss. Today, those numbers turned red as energy took back the headlines. What we should be looking forward to is how high will the interest rate hikes take the price of money? And finally, how to deal with low inflation?