What happened to the Fed since December? What occurred to make them so unsure of themselves about four rate hikes vs. how strident they were just three months ago? I think this puzzle has to be solved, because it is the difference between grabbing the next big entry point vs. taking a pass.
To set the scene, there were plenty of people calling for a rate hike all fall, but the collapse in China caused that talk to be put on hold. We can argue whether that's too specific, but when everyone with lots of capital is worried about where the Chinese stock market's about to open and we have an August flash crash that takes the Dow from 17,500 to 15,600 in a handful of days that dovetail perfectly with the Chinese stock crisis, well, you get the picture.
But then the Dow rebounded and China looked under control. Even as we were getting some softer non-wage data, the Fed took action and the next thing we know, we were taking out those supposed "artificial" flash crash lows, as emerging markets around the world collapsed -- as many said they would do -- our manufacturing sector got pounded and central bankers around the world decided to take advantage of a soaring dollar and throw acetylene on the fire.
At the same time, the one part of the manufacturing economy that had still be doing well despite the ever stronger dollar, the oil and gas industry, simply collapsed. While we want to, at least geographically, contain the issue to a dozen states that depend on oil and gas for their well-being, I think even the Fed was shocked at the manufacturing default risk that suddenly appeared all over the place.
Any thinking person on the Fed would have to believe that the hike triggered a wave of deflation that had been hinted about, but turned out to be spot on, coupled with a dramatic and instant decline in the wealth effect that had been buoying retail.
So reason number one for their tempering: the risks tilted suddenly toward deflation.
Reason number two? The lack of actual wage growth. I think the Fed sensed that somehow, as employment got stronger, there had to be a boost in wages. But the data say otherwise. If you strip out mandated minimum wage gains, wages have fallen, not gone higher. That's a fact that the ideologues -- so many of whom have microphones -- have lost touch with, because they are so darned rich they don't even know the real world any more. (Believe me; I might not know either, if I didn't have involvement in actual small businesses).
You just aren't getting what the text books say should happen. I think wages would be falling pretty hard if it weren't for the minimum wages gains. So, wage inflation isn't tame, there is no wage inflation at all, as the Fed can't reverse minimum wages.
Reason number three? Our export companies are doing so terribly while there is no wage growth, that that the national narrative seems to have changed: the foreign countries want to take our jobs away and they are succeeding, so let's throw the bums out and get protectionist. That's what this election has become about. I was amazed at how little people paid attention to the political dynamic out there when they discussed the Fed's no easy stance. To me, it is front and center.
Finally, I think that this holiday season was all about the digital economy. It became really clear that the digital economy, coupled with the new nightmare of globalization, is producing a lower standard of living, further compromised by both higher health care costs mandated for all but the indigent by the federal government, and a relentless spiral in rents from a critical housing shortage.
These all became too much to bear for the Fed. It didn't want to be the reason why we went into recession, just to please a handful of hawks who will never change their minds anyway. In other words, I think the Fed woke up to reality, and we are all the better for it.