Not so fast!
Last week, in the worst kept secret on Wall Street, the US Federal Reserve lifted its interest rate target off the zero floor for the first time in more than 6 years and set expectations for future rate hikes, including a full percentage point rise in 2016. Recently our global research process unearthed a few insights that suggests the Fed may end up being relatively more gentle when it comes to monetary policy activities over the next year or so.
In large part the Fed’s decision was predicated on the world’s largest economy expanding – and continuing to do so – as well as inflation picking up towards the 2 per cent goal. See the excerpts below from the official press release:
“Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace”
“The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will continue to expand at a moderate pace and labor market indicators will continue to strengthen”
“Inflation is expected to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further”
Indeed the members of the Fed on average expect to lift the benchmark Fed Funds rate by around 1 percentage point next year alone. By 2018, the Fed is forecasting policy interest rates to have returned to a more normal level of 3 per cent to 4 per cent. See the scatter plot of projections released by the Fed below:At the same time the Fed has definitely left itself some room to take a more subtle approach to rate rises by commenting that “…the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data”. We can very likely see a scenario where a shallower trajectory could be warranted.
Specifically, as we dug deeper into the US trucking industry last week we noticed something interesting, even contrary to the Fed’s high level assessment of the US economy. As oil prices have been falling (the driver of the Fed’s so-called “transitory” contributor to current low inflation levels) the competitive trucking companies have passed these savings onto customers. Typically, lower transport prices would stimulate better volumes for truckers. But this hasn’t been noticed at a grass roots level, with one trucking executive noting in the Wall Street Journal:
[the uptick in business is] “nowhere near” [past years]…”Whatever is causing the economy to remain slow is damping what would otherwise be a strong season”
The weak demand, coupled with existing overcapacity in the industry, is driving down freight prices. Long-haul trucking spot rates are down 16 per cent to 18 per cent in the past year according to DAT solution, a freight broker. Don’t worry about inflation – this part of the economy is experiencing deflationary forces!
While we remain completely aware of top down forces, the global team works hard for Montaka and Montgomery Global Fund clients by uncovering and acting on granular and nuanced insights from the bottom up. Our research into the US trucking space so far supports our belief that the Fed is unlikely to be able to raise rates too quickly, nor in line with its own forecasts.
Christopher Demasi is a Portfolio Manager with Montgomery Global Investment Management. To invest with Montgomery domestically and globally, find out more.