Price Headley Tells CNBC Fed's Rate Hike Plan Will be Tempered

Posted by jbrumley on June 14, 2017 11:21 AM

Will it or won't it? Will the Federal Reserve bump interest rates up by a quarter of a point when it has a chance to Wednesday afternoon? Or, will Janet Yellen and her cohorts opt to stand pat and keep rates where they are?

The consensus was a 98% chance the FOMC would indeed increase the Fed funds rate by 25 basis points. That, however, we before Wednesday morning's release of May's inflation data. With the annualized consumer inflation sliding from April's 2.2% to 1.87% -- the third consecutive monthly decline -- the Fed may be fighting inflation that doesn't exist.

Nevertheless, founder and chief Price Headley is still looking for the Federal Reserve to rather interest rates up one notch on Wednesday.

Yet, Wednesday's impending news is already losing its meaning, replaced by a bigger-picture look down the road. Headley explained to CNBC's Street Signs on Tuesday evening:

"The bottom line is, what is the Fed say about how they want to unwind some of their balance sheet? If they were talking about the economy being really good looking forward -- even though a lot of the recent data hasn't been that good on the economy here in the United States (we had the weak jobs report this past month and some generally-anemic type of growth numbers) --  if the Fed was going to say they really projected big growth ahead and that they were going to be unwinding sooner to control inflation, that would be a problem. But, that's not going to happen."

As for timing, Headley is bucking the consensus for a September rate-hike, suggesting the FOMC will skip its opportunity to put a rate increase in place then and postpone the pulling of that trigger until September. He expects two and possibly even three more interest rate increases in 2018. As the BigTrends President put it, "they're trying to normalize what's been far too low of a Fed funds rate," meaning Yellen and the Fed's governors are walking a tightrope.

There is a silver lining edging the dark clouds though. Headley went on to say:

"The biggest positive surprise for all these markets in 2017 is that the long end of the curve, or longer-term interest rates, have not been hurt by the Fed's tightening. Long-term rates have come down. At one point we were up even on the ten-year around 2.5%, and now we're down around 2.25% and 2.2%... in that range. Bottom line is that I think the positive surprise is that low long-term rates is good for the mortgage market, for housing, it's good for the economy, and thus it's good for stocks. So, I think the best positive out of this is that the Fed's short-term actions haven't hurt longer-term interest rates."

In other words, while rising rates could in many cases crimp the stock market, in this case, the slow pace of rising rates and the fact that long-term rates remain contained is essentially dovish, even if that's not the Fed's goal.

Still, the rising tide of a bullish environment doesn't lift all boats equally. Some sectors are doing better than others, and Headley has his favorites. He told Street Signs' host on Tuesday :

"We saw a little rotation last week, some profit-taking in technology stocks, with those proceeds going into financials, and into energy. I was buying some of the tech on the pullback, some Facebook as well as some Microsoft -- two of my favorites -- and at the same time also not really liking how Apple responded as much, so I'm staying away from that one here in the short-term. But, at the same time, I still like defense stocks, as they're natural beneficiaries of what's coming for the U.S. Also, some select financials. Citigroup is one that I bought that's one of my favorite banks stocks. It acted the best by far in the latest market run. So, there are definite opportunities amid the rotation. At the same time, I'm underweighting energy."

The Federal Reserve's official interest rate decision will be posted at 2 pm EST on Wednesday. To watch the entire interview with CNBC's Street Signs, go here.