Sometimes insight about the economy can come from the most unlikely of places. Today, a message from a famous children’s story has particular significance and resonance.
Remember Goldilocks and the three bears? One bowl of porridge was too hot, one too cold, and one was “just right.” An apt analogy for our current economy, Americans are now in a place that’s just right.
Why? This position of the current market high is due in large part to Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, keeping interest rates in the “Goldilocks Zone.” Current interest rates aren’t low enough to threaten an overheating of the economy with the specter of inflation. They also aren’t high enough to tip us into recession.
And this situation creates a fertile field for stocks to thrive. The steady, predictable interest rates help CEO’s grow their companies and earnings. Not too hot, not too cold, interest rates are in a sweet spot.
You may have heard the phrase “Goldilocks Zone” floating around for the past few years, and it’s come to be a good descriptor for an economic state that’s balanced in a number of ways. While “just right” doesn’t directly translate to “perfect,” it does mean the economy is well positioned to maintain at least a low level of growth with the help of a patient and accommodative Federal Reserve Bank.
If things aren’t balanced, history has shown that the Fed can get antsy and adjust interest rates to restore equilibrium. This has been true even in outwardly decent economies, and the results can be devastating.
Imagine the Fed pulls the rug out from under interest rates in an attempt to rebalance. If they decide to raise interest rates and do so too quickly, the resulting higher borrowing rates will choke out activity. The flipside is that ultra low-interest rates create a bubble that will inevitably burst.
But recently, the FED has been threading the needle adeptly on very gradual rate rises. And Yellen has continued to carefully sow the seeds of stability and growth. In a meeting with Congress this past week, Yellen reiterated that any future rate hikes would remain gradual. When the markets heard the news from Washington, they were off to the races again.
Economic data remains the driver behind the “Goldilocks Zone” phenomenon. This week we’ve heard reports of data indicating inflation. Other data points to deflation but doesn’t carry enough heft to be truly concerning. After all, we’re still below the Fed’s target of 2%.
It’s well worth it to weigh other sources of data, too. Sure, retail sales have dropped 0.2% for the month, but retail is still up 2.8% year over year. Turning to projected second quarter earnings, the S&P 500 is expected to generate another 7% – 8% rise. Remember, that’s after a double pace for the first quarter of 2017.
This is the story we’re living in real life, beyond fairy tales. Our economy is warm. Inflation is warm. Stocks are in a perhaps unexciting but effective environment. And the FED continues to cultivate a healthy economy, and will for the near future. Instead of a rate hike in September, data and commentary indicate that we won’t see another bump until December.
The middle ground is always better than extremes, especially when it comes to our nation’s economy. Today we’re in the long race – not running too hot or too cold, but set up for slow, steady growth.