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24-07-2015, 12:44 PM
Why the US Federal Reserve is trying not to raise rates
BUSINESS SPECTATOR JULY 24, 2015 10:08AM
Adam Carr
Chief Economist Eureka Report
Sydney
Get this. US jobless claims (new filing for unemployment benefits) slumped to their lowest level in 41.5 years. That’s to the week ending July 18 — they’re down about 26,000 from the previous week (at 256,000). If that wasn’t enough, we found out overnight that the number of home sales (existing) is the strongest since 2007, while house prices themselves (also existing) are at a record: a lofty $236,000.
Even with that kind of data flow, the funny thing is that only half of the economists surveyed by Bloomberg reckon the Fed will hike at the September meeting. You’d think it’s a done deal, yet the market is even less convinced, increasingly pricing in the first move for 2016. Bond yields actually fell overnight.
Part of the problem is that the market has been playing this guessing game with the Fed for five years now and uncertainty is high. It could hike, it certainly should hike — but there is one reason it might not. That one reason, ironically, might be due to movements in the labour market.
Remember the game for Fed watchers over these last few years hasn’t been about plugging growth, inflation and unemployment outcomes into some model to determine whether rates should be higher. It has had plenty of reasons to move since 2010 when the market first expected a rate hike.
Instead, it’s been more about looking at what the Fed could use to justify a lower rate for longer stance. It’s getting hard, admittedly. The labour market does look good and ordinarily you’d think that an unemployment rate, currently at 5.3 per cent from a peak of 10 per cent, would be sufficient for them to lift rates, as would the nearly three million jobs that have been created over the last year alone. That’s nearly eight million jobs over the last few years.
Why is the Fed doing this? There are a few reasons.
Over in Europe, the central bank is still printing money; ditto the Japanese. No one wants the US dollar to get too high. Then of course, no one wants bond yields to get too high either. And there are probably some who are genuinely of the view that higher rates could destabilise growth. This is a Federal Reserve that is terrified of derailing the recovery and it actually has the International Monetary Fund urging it not to hike.
It’s then a simple matter of downplaying figures like those jobless claims numbers we saw last night. Admittedly there are some seasonal issues with the July figures. Car plants usually close down sometimes, and that throws the seasonal factors around. So that 41-year-low probably isn’t one. Even so, the jobless claims numbers have fallen hard — there is no doubt they point to a lower unemployment rate.
How’s the Fed going to get around that? Easy.
The unemployment rate, currently at 5.3 per cent, isn’t going to fall in perpetuity. In fact the Fed is of the view that a number around 5 per cent isn’t unusual and in fact should be regarded as normal. In economic parlance it could be regarded as the non-accelerating inflation rate of unemployment (NAIRU).
Three things to note here. Inflation is currently low, barely above 1 per cent on the Fed’s favoured measure and a good way below the 2 per cent plus threshold. In fact the Fed want to see it get safely above 2 per cent. Yet if an unemployment rate of 5 per cent or so isn’t an inflation accelerating rate, then it’s a good bet it is not going to be too concerned.
Chances are it would want to see it get to “normal” or below and then hold there for some time, just so it could be confident that the labour market had actually reached maximum employment, consistent with their statutory mandate.
From the Fed’s perspective, while unemployment may be falling, the rate of underemployment is still high at 10.5 per cent. That’s well down from the peaks, but it’s still almost 2 percentage points above the average. Similarly, wage growth is still low — less than two-thirds the average.
Here’s hoping the Fed hikes this year — the sooner the better. Unfortunately there is still plenty of things the Fed committee can point to, should it want to delay again.
BUSINESS SPECTATOR JULY 24, 2015 10:08AM
Adam Carr
Chief Economist Eureka Report
Sydney
Get this. US jobless claims (new filing for unemployment benefits) slumped to their lowest level in 41.5 years. That’s to the week ending July 18 — they’re down about 26,000 from the previous week (at 256,000). If that wasn’t enough, we found out overnight that the number of home sales (existing) is the strongest since 2007, while house prices themselves (also existing) are at a record: a lofty $236,000.
Even with that kind of data flow, the funny thing is that only half of the economists surveyed by Bloomberg reckon the Fed will hike at the September meeting. You’d think it’s a done deal, yet the market is even less convinced, increasingly pricing in the first move for 2016. Bond yields actually fell overnight.
Part of the problem is that the market has been playing this guessing game with the Fed for five years now and uncertainty is high. It could hike, it certainly should hike — but there is one reason it might not. That one reason, ironically, might be due to movements in the labour market.
Remember the game for Fed watchers over these last few years hasn’t been about plugging growth, inflation and unemployment outcomes into some model to determine whether rates should be higher. It has had plenty of reasons to move since 2010 when the market first expected a rate hike.
Instead, it’s been more about looking at what the Fed could use to justify a lower rate for longer stance. It’s getting hard, admittedly. The labour market does look good and ordinarily you’d think that an unemployment rate, currently at 5.3 per cent from a peak of 10 per cent, would be sufficient for them to lift rates, as would the nearly three million jobs that have been created over the last year alone. That’s nearly eight million jobs over the last few years.
Why is the Fed doing this? There are a few reasons.
Over in Europe, the central bank is still printing money; ditto the Japanese. No one wants the US dollar to get too high. Then of course, no one wants bond yields to get too high either. And there are probably some who are genuinely of the view that higher rates could destabilise growth. This is a Federal Reserve that is terrified of derailing the recovery and it actually has the International Monetary Fund urging it not to hike.
It’s then a simple matter of downplaying figures like those jobless claims numbers we saw last night. Admittedly there are some seasonal issues with the July figures. Car plants usually close down sometimes, and that throws the seasonal factors around. So that 41-year-low probably isn’t one. Even so, the jobless claims numbers have fallen hard — there is no doubt they point to a lower unemployment rate.
How’s the Fed going to get around that? Easy.
The unemployment rate, currently at 5.3 per cent, isn’t going to fall in perpetuity. In fact the Fed is of the view that a number around 5 per cent isn’t unusual and in fact should be regarded as normal. In economic parlance it could be regarded as the non-accelerating inflation rate of unemployment (NAIRU).
Three things to note here. Inflation is currently low, barely above 1 per cent on the Fed’s favoured measure and a good way below the 2 per cent plus threshold. In fact the Fed want to see it get safely above 2 per cent. Yet if an unemployment rate of 5 per cent or so isn’t an inflation accelerating rate, then it’s a good bet it is not going to be too concerned.
Chances are it would want to see it get to “normal” or below and then hold there for some time, just so it could be confident that the labour market had actually reached maximum employment, consistent with their statutory mandate.
From the Fed’s perspective, while unemployment may be falling, the rate of underemployment is still high at 10.5 per cent. That’s well down from the peaks, but it’s still almost 2 percentage points above the average. Similarly, wage growth is still low — less than two-thirds the average.
Here’s hoping the Fed hikes this year — the sooner the better. Unfortunately there is still plenty of things the Fed committee can point to, should it want to delay again.