France's Emanuel Macron's popularity surge has pushed capital markets to a spin, leading to increased risk. Investors who expect to hear strong words from the Federal Reserve can be disappointed. There are signs all around: The United States 10 year Treasury yields have risen almost 20 basis points from their lows. The complication is that the base economic picture has remained unchained.
US data low
United States data has actually deteriorated. The economic surprise index of Citibank is now firmly inside negative territory. Even the economic reports which were published on May 2 were tepid. Personal income in March grew at a measly 0.2 percent. Consumer spending showed zero percent growth during the same month. The much awaited consumer spending rise cannot be seen.
The Federal Reserve's latest tough stance is to do less with the economic fundamentals and much more to do with the desire to take control back over monetary policy. The Feds want to revert to normalization as quickly as possible. The principal reason the Federal Reserve wants to increase present rates as it can enjoy the flexibility to reduce them during next economic slowdown.
Federal funds futures have priced in a more than 75 percent possibility of hike in rates in June. The United States dollar, Japanese Yen comparison is now firmly up from its lows of 2017.
To add to the problem, Personal Consumption Expenditures or the PCE – arguably the inflation measure preferred by the Federal Reserve was found to be only 1.6 percent on the YOY basis. This is below two percent target sought by the central bank.
The data in its superficial level has proved the stance taken by Neel Kashkari. The latter is President, Federal Reserve Bank of Minneapolis. He is a well-known renegade face in Fed circles. He has voted 'no' to hike in rates during the March meeting. In an interview to a media house, he said that the Federal Reserve, for the last six years, have predicted inflation to happen in a short time- but economic hardship never happened.
The path adopted by the Federal Reserve is littered with risk. Even though the American economy is chugging along now, any more tightening will push down consumer spending. The absence of immediate catalysts will not lead to growth. It is hard to see whether the Federal Reserve will continue its tough act prior to entering the June meeting.