Hale Stewart

About the Author Hale Stewart

Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM from the Thomas Jefferson School of Law in domestic and international taxation where he graduated Magna Cum Laude and is also a Chartered Asset Manager, Chartered Wealth Manager and Chartered Trust and Estate Planner from the American Academy of Financial Management. He is the author of the book US Captive Insurance Law. You can read him daily at the Bonddad blog (www.bonddad.blogspot.com).

Can The Fed Pull Back Its Rate Hike Plans?

By New Deal democrat

For the last month in my “Weekly Indicators” column, I have been writing about an intensified deflationary pulse in the US economy. For example, one month ago, in my summary, I wrote:

“Several intensified trends are emerging. The positive trend is increased spending by US consumers as imported deflation finally teams up with a little improvement in wage growth. The negative trends are increased downturns in rail, shipping, and steel – i.e., that part of the US economy most exposed to global weakness – which have been joined by intensified strength in the US$ and a nascent upturn in interest rates courtesy of an anticipated December rate hike by the Fed.”

This renewed pulse has now shown up in the November ISM index, which fell to a 3-year low of 48.6. This is actually bad news, showing an economy that is near contraction. The silver lining is we have seen plenty of times before where the ISM index fell to this level without the economy going into recession. In the below graphs, I subtracted 48.6 from the reading, so that the November reading is at the 0 line. Here is 1948-1980:

And here is 1981-present:

A level between 48 and 50 way associated with an oncoming recession 10 times – and just a mid-cycle correction another 8 times.

The simple fact is, the US$ has been accomplishing a tightening without the Fed hiking rates at all. Here is the chart of the broad trade-weighted US$ since it began its ascent in July 2014:

In November, it surged again to new highs.

At some point, if the industrial recession becomes deep enough, it could overcome the still-growing consumer economy. The strengthening US$ was certainly a factor in the 2001 recession:

At present, however, unlike 2001, neither the yield curve nor housing nor real money supply are playing along.

But this is a potent reason for the Fed to pull back on their rate hike plans.