Why the Fed will decide to raise interest rates

Heads up, investors, here comes another monkey wrench.

By now, just about everyone agrees that the economy is in trouble. The financial markets have already reacted to the thought that we might be headed into another recession. The pundits are seriously debating negative interest rates — charging people to keep their savings in a bank — as the next desperate effort to help the economy.

Federal Reserve Chair Janet Yellen got lambasted in Congress by both political parties. And another interest rate hike by the Fed — just about everyone now agrees — is simply out of the question.

Even the minutes of the January Fed meeting show that Yellen might be having second thoughts about the rate-hike policy.

But get ready for another switcheroo: The economy is suddenly looking better. I emphasize the word “looking” because it really isn’t actually better — at least not by any appreciable amount.

But the Atlanta Federal Reserve, which keeps day-to-day tabs on the US economy, says growth has ratcheted up to an annual rate of 2.6 percent so far in 2016. That’s growth on a “seasonally adjusted basis,” which will soon become important to this story, as it has in so many others.

GDP grew at just a 0.7 percent annual rate in the fourth quarter of 2015, and that figure is likely to be revised downward. Let me put this another way: If the economy were a patient lying on a gurney, someone in scrubs would be pumping its chest.

Any logical and halfway intelligent human can figure out for himself or herself that the economy didn’t go from near death on Dec. 31 to rosy-cheeked and briskly walking starting Jan. 1.

So let me go back to my Dec. 10, 2015, column: “The GDP in the first quarter could be a real shocker. To understand why, you need to know a little about seasonal adjustments, the other little statistical trick that makes data go up and down magically.”

Seasonal adjustments look back five years to see what’s normal for a particular time of the year, with the most recent years carrying the most weight in the calculation.

The first quarter of 2014 grew by an annualized rate of 0.6 percent, and the first quarter of 2015 fell by 0.9 percent because of horrible weather both years. So the seasonal adjustment program this winter might be tricked into thinking that those reduced levels of growth are normal.

“If the weather happens to be better in early 2016, a more normal period of growth could end up looking better in the government statistics than it is in reality. If this happens, there will be howling for another rate hike even if the [January] employment figures are crappy,” I wrote on Dec. 10.

The January employment data were crappy and the weather is better in the first two months of this year than it was for the same period in 2014 and 2015.

That Atlanta Fed projection was increased recently to 2.6 percent because the Census Bureau said retail sales growth had increased by 3.2 percent in January.

But sales really didn’t grow that much. Growth in retail sales was only 1.44 percent before the whacky seasonal adjustments took hold.

The huge difference between the 3.2 percent seasonally adjusted retail sales growth and the real growth of 1.44 percent probably occurred because the two previous bad winters caused Census’s computers to expect very little improvement.

This same fake-out will probably occur with all government statistics this winter. Worse, the Atlanta Fed probably places its own seasonal adjustments on top of the adjustments it gets from various government agencies.

Back to my point: The markets should soon be experiencing whiplash after trying to figure out whether the Fed will raise interest rates because of the suddenly upbeat data.

I’m sticking with my original prediction: I think the misleading economic data, including the usual boost in reported job creation in the spring, will give the Fed enough of an excuse to raise rates. But it won’t do so until early summer.

Then, by mid-summer, the next twist happens in the story. But I’ll save that until later.