Monthly Archives: October 2016

“Several (Fed) members judged that it would be appropriate to increase the target range for the federal funds rate ‘relatively soon’ if economic developments unfolded about as the Committee expected.” That’s according to the just-released minutes from the September FOMC meeting.

Never mind that the economy has created nearly 15 million jobs over the last six years. Never mind that the unemployment rate is 5.0%, half what it was at its peak. But try convincing the Fed it’s time to hike rates even a second time in the economic cycle.

It’s a very dovish, very cautious Fed when it comes to pulling the rate-hike trigger. It’s what I sometimes call an “All my ducks in a row” Federal Reserve.

Think about it.

Worries about China, a wobbly stock market in January, a rising dollar, a surprise Brexit vote, and a weak employment report (remember May’s disappointment?). None of these created any significant damage to the U.S. economy. Yet, they all forced a pause in the rate-hike cycle.

So, what might be lurking behind the next corner that might persuade the Fed from going ahead with another 25 bp increase? Stay tuned.

Well, it was bound to happen. You know, a too big to fail bank in Europe creates headlines at home. This time, it originated in Germany.

Deutsche Bank is Germany’s largest bank, sporting assets that are just shy of $2 trillion. It’s also Europe’s fourth-largest bank.

Like many of its counterparts in Europe, its capital cushion isn’t where it needs to be in the event of a serious economic downturn.

Further, negative interest rates and a weak European economy are a hindrance to profitability.

Unlike major banks in the U.S., which were much more aggressive in raising capital post-2008, European banks gambled on faster economic growth to bolster their capital positions.

It hasn’t been a good bet.

Lehman Moment—not likely

Unlike 2008, the economic fundamentals aren’t deteriorating, Deutsche isn’t choking on toxic assets (that we’re aware of), its funding sources are more diverse, and it can tap into a liquidity lifeline from the European Central Bank. In each case, the same couldn’t be said of Lehman Brothers.

Moreover, we know what happens when a systemically important financial institution fails. While new EU rules limit taxpayer support for bailouts, it does not prevent them.

And it’s hard to imagine a scenario where Germany would allow its largest bank to implode in a disorderly fashion, taking the German economy with it.

That doesn’t mean we can’t see short-term volatility in U.S. markets that are tied to a European bank, but a crisis sparked by the disorderly failure of one of its largest banks is unlikely.

Have you ever driven a car with a manual transmission? If so, you know that second gear isn’t the gear you want if cruising speed is your goal.

Yet, second gear is how I would describe today’s economy. Not just today, but over much of the expansion.

I could point to plenty of data, but let’s look at two closely followed indicators that span across the private sector.

During August, both the ISM Manufacturing Index and the ISM Non-Manufacturing Index came in well below expectations.

Not to worry, the September releases, which were out on Monday and Wednesday, suggested an acceleration in growth, especially for the service sector. At a reading of 57.1, the broad-based service sector has kicked into gear! Right?

Well, not quite so fast.

Let’s compare the readings to a baseball game. The outsized jump in the service indicator would be the equivalent of a home run. But in today’s subpar recovery, the occasional home run is mixed in with singles, doubles, and a fair number of strikeouts.

While the latest readings are encouraging, let’s not get too excited. Digging into the underlying trends and several months worth of data, it’s safe to say the economy is growing, but it’s far from robust growth.

In other words, we’re still stuck in second gear.