The US economy contracted a steep 2.9% in the first quarter, the government reported this morning, a decline that took many by surprise, but not Keith McCullough and the Macro team here at Hedgeye. They have been making the #GrowthSlowing call for months.
They also expect the Fed to react, writing today, “With respect to 2014, the Fed will continue to surprise investors by incrementally easing as the year progresses. An example of this is last week’s rhetorical easing via extending rate hike guidance. A cessation of tapering at the September 16-17 FOMC meeting is not out of the question (then the Fed will likely have to cut their 2014 growth forecasts – again).”
That leads us to today’s poll question.
Does today's GDP stink bomb put Fed easing (more cowbell!) back on the table?
At the time of this post, 58% voted YES, 42% voted NO.
Voters who believe YES the GDP print put Fed easing back on the table reasoned:
- The Fed will continue the easing beyond original plans, but not in the form of buying T-Bills, mortgages, etc. Fed will continue to taper down to zero and then ease through some backdoor method not so visible to the markets, i.e., the EU buys T-Bills and in turn Fed buys ECB debt somewhat behind the scenes. All IMHO.
- The Fed can't help itself. At the first sign (in their minds) of any problem, they'll revert to more easing. Plus, I thought Janet Yellen was very dovish when she spoke last week.
- We've built a habit out of easing, and weaning off of that will be nearly impossible since it's produced results in terms of stabilizing the markets.
Those who voted NO Fed easing is not back on the table has this to say:
- No a change in the monetary policy will only confuse the markets. By the way the GDP number is backward looking, in theory the FED is looking forward and they are seeing a better economy in the future (of course they could be wrong as they have been so many times in the past). So no, IMO they will stay put.
- Yellen has a clear runway to stay the course. Any bumps in the road can be attributed to the prior Fed (OK, so she was co-chair, but that's only "co") and both the political will - and more important stock prices - seem to want her to continue to taper and beyond.
- Although very bad, the data is incredibly skewed by the drop in healthcare spending. A cynic would say this is to help flatten the 2Q final print when we'll see a big healthcare spend reversion just a few weeks before mid-term elections.
- GDP is looking in the rear-view mirror. The Fed will focus on what's happening this quarter and next. By all accounts, we're seeing some level of recovery, albeit choppy. As such, I think the Fed stays the course and keeps tapering.