US Bond Market Week In Review: Did The Fed Make A Mistake?

Did the Fed make a mistake when it raised rates last month? Obviously, we won’t know until we see more data. While the economic numbers through December confirmed the Fed’s decision, post January 1 data has been troubling. Retail sales are weak, industrial production is stalling, the leading economic indicators declined .2% and the coincident numbers are rising at a slower pace. An article by Peter Coy of Bloomberg explains both sides. The bears base their argument on the following data points: 1.) weaker corporate profits, 2.) declining stock prices, 3.) weak oil, and 4.) declining import prices.In contrast, the bulls look to the following points: 1.) the low rate of initial unemployment claims, 2.) the strong employment situation, 3.) lower gas prices, and 4.) a healthier consumer.But, as I noted in the equity market review, housing data provides the ultimate tie-breaker for the bulls. Residential construction is strong, building permits are at post-recession highs, builder sentiment is strong and sales are still increasing. So long as this economic sector continues growing, the possibility of a recession is low.      

On Wednesday, the Fed kept rates on hold.Their statement contained the following assessment of the macro economy:

Information received since the Federal Open Market Committee met in December suggests that labor market conditions improved further even as economic growth slowed late last year. Household spending and business fixed investment have been increasing at moderate rates in recent months, and the housing sector has improved further; however, net exports have been soft and inventory investment slowed. A range of recent labor market indicators, including strong job gains, points to some additional decline in underutilization of labor resources. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation declined further; survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.