In today’s newspapers it was reported that Janet Yellen, Fed Chair, signaled yesterday that a rate rise at the Fed’s December meeting was on the cards.
- Wall Street Journal: Yellen Signals Fed on Track to Raise Rates
- Financial Times: Yellen Signals US economy is strong enough for a rate rise
Baring news that rocks her view of the US economy, it seems we will see the first raise since 2006. There are several risks with this.
First, the global economic picture that stayed her hand in September has not changed all that much. In fact, it has gotten worse. Emerging markets are struggling as dollars are seeping away and back to the US where a stronger dollar and the threat of interest rate increases have attracted significant money movements.
Second the big global slow down has continued. Commodity prices remain depressed, even lower than in September. China’s growth continues to slide. The Euro zone continues to drift with additional threats from Dragi, the ECB Chair, that more QE and increased negative interest rates are coming and soon.
Third US businesses are reporting missed numbers in large numbers – which suggests that the US economy is past the “normal” upswing side of the business cycle. This would imply that we are in fact on the down-swing side of that cycle. As such, the Fed would normally be thinking about relaxing rates in order to encourage firms to borrow more cheaply to invest more, to fend off contraction. But the Fed can’t do this as it is torn between reasons to raise and drop rates. So what has changed to move Yellen’s hand?
It seems that recent data concerning wage pressure is moving Yellen’s views. It is true that there has been a spate, although small, of data that does suggests some wage pressure has finally started to appear. But it is hardly a broad measure and it may not be sustained, once the interest rate picks up. On Wednesday the Labor Department reported that inflation-adjusted hourly compensation for workers in the nonfarm business sector of the economy rose 3.4% in the third quarter, compared to the same quarter last year. This was the second largest jump since Q3 2009. This growth was after a figure of 3.3% in second quarter compared to that quarter in 2014. So overall wage pressure, albeit slight, is sticking and may start to tick up soon.
The negative signs for keeping rates low are also plenty: debt bubbles are all over the place again – we have student loans; we have risky morgages again being pushed to those of the population that can’t afford them; and more. So in some ways Janet Yellen and the Fed are damned if they do raise rates, and damned if they don’t. But it seems the focus on the US economic conditions outweighs her concerns, over and above global challenges.
And if you wanted more proof of this rockc-and-a-hard-place situation, look no further than the Bank of England. In ‘The Bank of England is a dove with clipped wings‘, Chris Giles of the FT today suggests, “After its [the Bank of England] move towards dovishness in the past month, Britain’s monetary policy risks now being constrained by both a lower and an upper bound.”
I think that with the ECB and even Japan touting more QE and relaxing rates, the US should hold off raising rates. We are like sitting in a boat that is rocking side to side. The water that splashes over the side are the dead weights that will eventually sink our boat and pull our economy down. By increasing rates when others are relaxing theirs, we rock the boat even more and additional balast rolls in. Too much too soon and we start to list even more.
The positive data is not even; its not even consistent because some parts of the economy are growing, some are stalled with debt bubbles, and some parts are still quite sluggish. The regions (US, Euro, Asia) need to coordinate theit actions. For if they do not, Yellen may well have to negate her new rate raise all too quickly in the New Year, to calm the economy and stablize that boat. If she has to do that, her assumed magical powers for reading economic tea leaves will be washed away. What then of her credibilty?