One Man’s Opinion: Are Policy Uncertainty And High Costs Holding Back The Investment Cycle Take-Off?

It’s true the US economy didn’t see the typical response that is witnessed when central banks initiate a zero interest rate policy, said Lindsey Piegza, chief economist at Sterne Agee.

Normally, lowering of interest rate by the Federal Reserve would trigger elevated economic activity with big and small businesses taking on more loans, thus drawing down the pool of available labor and starting to put upward pressure on wages.

But this time around despite the US Fed holding interest rates near zero for about five years, the investment cycle has failed to take off. So, the situation is typical in the US now and different from what a normal recovery would ideally look like, she noted.

A study showed savers over the last six years have lost over 750 billion dollars due to Fed’s near zero policy rate as deposits in banks have failed to keep pace with inflation. Asked to explain the implications of such an abnormal monetary policy, Lindsey said the Fed’s dual mandate is to ensure full employment and stable prices.

There’s still a lot of slack in the labor market while inflation indicators such as the PPI and the CPI are in net negative territory. The Fed can very well pass the buck to the federal government now because from the monetary policy standpoint, they have done everything they could to get the economy back on track.

Now fiscal policies need to supplement the central bank’s policy. Talking to businesses, both big and small, across the country, reveal that they are worried about healthcare costs, tax uncertainty and regulations, which explains why they are not hiring and expanding despite the prevailing near zero interest rates, she noted.

Yields in German bunds suddenly surged Thursday quite inexplicably. Asked if it was just profit taking or bursting of an asset bubble that many investors think have been forming over the past several years, Lindsey said it was probably some profit taking by investors.

The bond market looks extremely bullish and there’s a lot of downward pressure on interest rates as the US economy continues to struggle to find traction. The latest GDP reading showed a deeper malaise across all sectors of the economy, something that can’t be considered an aberration caused by disruptions in the coastal port operations or an unseasonably cold weather.

Both the US and global economies are likely to hobble along not only in the second quarter, but probably for the remaining nine months of the year, she explained.

Asked why cheaper gas prices have failed to spur consumer spending, Lindsey said US consumers outspent during the initial days of the gasoline price windfall. In October and November, there was a nice increase in retail sales though by December consumers started to pull their purse strings.

Consumers tend to cut expenses when they are unsure about their fiscal conditions, which means consumer are increasingly getting reluctant about financing today’s spending with tomorrow’s dollars. They are witnessing a slack labor market and moderating job opportunities along with stagnant hourly wages, which makes them worried about future income opportunities, she observed.

Asked if she expects the economy to rally in the second and the third quarter, Lindsey said the first quarter set the economy up for a trend that looks very similar to what was witnessed during the initial months of last year.

But since the data has continued to remain soft in March and April, it’s unlikely the economy would rebound as strongly as it did last year. The economy is likely to grow at 1 percent on average in the first six months of the year followed by about a two percent pace in the second half of the year. Averaging that out on an annual basis, 2015 GDP is likely to grow well below the trend-rate of 2.3 percent, she concluded.

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