Strong Enough?

"All that is gold does not glitter, Not all those who wander are lost;
The old that is strong does not wither, Deep roots are not reached by the frost." - J.R. R. Tolkien

There is a lot of debate going on at present about whether the Federal Reserve considers the United States economy strong enough to handle a second interest rate increase.  The number out today seem to indicate that the economy is more robust than was previous thought as Q4 GDP was revised up to 1.0% from 0.7%.  While this is a significant increase 1.0% is hardly robust.  Both consumer income and spending ticked higher in January pushing inflation higher than expected.  All of these data points are positive and should give teh Federal Reserve some much needed credibility for raising rates last year however are they strong enough to force their hand in increasing rates next month or even alter this year?

Were the global economy in a stronger position I would have anticipated an increase in the near future but the issue is that the United States is rapidly becoming the only shining star providing light for a gloomy global economy.  Since the announcement of the data points the dollar resumed its ascent and this will continue to erode not only emerging markets with debts tied to the dollar but exporters in the United States.  While this may not be a catalyst to cause a recession in the United States it may have the impact of taking the growth of the rest of the world lower.

I have to say that I am relatively surprised at the continued success of the United States economy and am hopeful that it can continue.  Certainly I do not see a deep drawn out recession on the horizon but I also do not see robust growth either.  I expect that the Federal Reserve will leave interest rates alone at the next meeting and unless there is a dramatic improvement in the global growth story or inflation in the United States starts to really take hold I doubt that there will be more than one more 1/4% increase in rates this year.

As far as the stock market goes then it may end up being a market full of gyrations and little upward or downward movement, sort of a barking dog situation.  This would not be a bad outcome when you consider such an extended bull market.  During this time it will be interesting to see how the Federal reserve acts and whether companies can somehow stem the slowdown in earnings however this will become harder and harder the higher the dollar climbs. For this reason I continue to expect weakness in the stock market but the damage may be limited to less than a bear market but that will be determined by the direction of the Federal Reserve as while the economy may be able to weather another rate hike I do not think the stock market has the backbone.