Investors are trying to figure out whether the Federal Reserve will increase interest rates for the first time in nine years at its Sept. 16-17 policy meetings. The guessing game is complicated by recent stock market volatility amid concerns about China’s economy, but it is unlikely the Fed would delay its rate hike solely because of the China effect.
The timing of the Fed’s decision to reverse its near-zero interest rate policy is further complicated by conflicting economic signals that emerged from the last major data point before the Fed meets to discuss a rate increase. The Labor Department reported that the U.S. economy created 173,000 new jobs in August, less than expected, but the headline unemployment rate dropped to 5.1 percent, the lowest since April2008 and a level the Fed considers to be full employment.
Weekly earnings increased to a 2.4 percent annual rate in August and average number of hours worked also rose; all good for increased consumer spending.
Wages and GDP from the second quarter that showed a 3.7 percent annualized growth rate may keep rate increase prospects alive. Moreover, a tightening labor market and decisions by several state and local governments to raise the minimum wage might give the Fed confidence that the inflation rate, which collapsed with oil prices, will move closer to their 2 percent target.
On the other hand, the broader measure of unemployment, including those stuck in part-time jobs and discouraged workers who have stopped looking for work, remains at 10.4 percent. The labor participation rate remains low at 62.6 percent.
And just to make things more complicated, the reported jobs and GDP numbers are far from certain. As always, you can expect revisions in the coming months.
In an effort to induce growth during the financial crisis and subsequent Great Recession, the Fed aggressively eased monetary policy in the final months of 2008, slashing short-term interest rates.
The Fed used additional tools to stimulate the economy by easing credit and keeping interest rates low. Making housing more affordable and enabling households to refinance their mortgages at lower interest rates would free up income for consumer spending. For corporations, reducing the cost of capital would promote investment. Commentators routinely argue whether QE has improved the real economy. Critics contend that reliance on ultra-low interest rates is insufficient to accelerate economic growth. The policies may support economic activity, but can’t take the place of fiscal policies such as addressing mounting debt, rising entitlement program costs, the need for infrastructure investment, repairing the tax code, and trade policies that advantage the American worker.
These critics argue that the Fed’s policies transfer wealth away from savers and force savers and pensioners to take on more credit risk in an effort to boost returns in an era of low rates. Corporations use cheap money to engage in stock buyback programs rather than capital investment.
Put another way, the Fed pushed trillions of dollars of new money into banks, but too little trickled down to the real economy and job creation. According to this crowd, the Fed has been fighting for the one percenters.
John Stuart Mill said, “He who only knows his side of the case knows little of that.” It will be very interesting to see what the Federal Reserve does when it meets later this month to sort out piles of conflicting data and decides whether it’s finally time to raise interest rates.
Originally Published: September 12, 2015