The Fed Is Starting to Spout Some Pretty Bold Statements!

Here’s a bold statement: Despite weak economic data prior to and since last month’s Fed meeting, Atlanta Fed President Dennis Lockhart unexpectedly disclosed that he would want to raise rates in September. That is, unless there was a “significant deterioration” in the economy before then.

Since Lockhart is neither a hawk nor a dove, analysts look to his opinion as an indicator to what the Fed might be thinking. Sure enough, the markets reacted and interest rates spiked on his comment.

I’ve mentioned before that the Fed has been all talk and no action. Well, here we are again!

I can understand the markets reacting to economic data releases. But for a Fed official – especially a voting member – to start spouting off, causing a market stir? That’s just frustrating.

Was Lockhart trying to talk the market up after the worst quarterly result from the employment cost index’s 33-year history? Of course, his comments were made before Challenger released its job-cut report announcing over 105,500 layoffs last month.

Or, maybe he was trying to brush over our year-over-year inflation reading of 1.3%. After all, we’re still a ways off from the Fed’s target reading of 2% from the Bureau of Economic Analysis PCE Index.

Adding to the picture, Friday’s jobs report went pretty much as expected. The economy added 215,000 jobs. Wages rose 0.2% with the participation rate at 62.6% (again matching the worst level since 1977). And the unemployment rate was 5.3%, again, as expected.

Stocks and bonds didn’t react too much to the jobs report and Treasury yields continued to move slightly lower. Then Monday, the Fed’s Labor Market Conditions Index was weaker than expected, just slightly above last month but still showing very soft employment growth.

On top of a mixed employment picture and near-zero real inflation, Lockhart’s own Atlanta Fed reported a GDPNow forecast of a mere 1% growth rate for the U.S. economy in the 3rd quarter!

That might make Mr. Lockhart’s comments about raising rates seem laughable, but it goes to show you that the Fed can indeed talk the market into action.

For instance, Lockhart spoke again Monday, and while he didn’t mention September, he did say the Fed is “close” to raising rates. Again, Treasuries sold off and yields rose. Lesson learnrned? If they can’t do anything, they sure can talk.

For now, he’s passed the baton on to William Dudley, another voting member of the FOMC who will be speaking Wednesday. May the drama continue.

Lance Gaitan

Lance Gaitan

Editor, Dent Digest Trader