Wednesday Fed Watch – Do Interest Rates Matter?

Image result for fed rate hikes 2018It's Fed day! 

The Federal Reserve is expect to raise rates by 0.25% this afternoon but what matters more is what Chairman Powell has to say at 2:30.  In the last statement, the Fed eliminated a line from the March statement that said “the committee is monitoring inflation developments closely.”  That seems to indicate they feel inflation is now at their 2% goal and clearly unemployment is below their goal so now the Fed must move to head off inflation pressure before it begins.

In fact, this morning's Producer Price Index is up 0.5%, miles above the 0.2% expected by leading economorons, who obviously do not shop where we shop or eat where we eat.  This should bring the markets down from their perch and we can short the S&P (/ES) below the 2,790 line (with tight stops above) and, of course, the Nasdaq (/NQ) at 7,250 and the Russell (/TF) at 1,685 – all Sept contracts now (thanks Jeff!).  Yes, we keep trying to short and it keeps failing but – ONE DAY!  

There are already many signs of wage inflation.  The recent Beige Book indicated all regions were having a lot of hiring pressures and once employers have to start competing for employees by raising wages and benefits – that's a genie that's very hard to put back in the bottle.  Wage inflation is bad for Corporate Profits and wages are about 30% of a Corporation's Operating Costs so a 10% increase in wages knocks 3% off earnings unless they raise prices – which adds to inflation and makes more workers demand higher wages….

Image result for wages profitsI remember working in the late 70s and early 80s when it was downright insulting if you didn't get a 5% annual raise just for doing your job 10% was fairly normal for doing a good job and when you took a job that started at $25,000, you fully expected to be making $50,000 in less than 5 years.  That seems like a fantasy these days as it's been decades since the workers have been given a fair share of the profits.  


continue reading