Jobs Numbers Mean Fed Rate Rise In September At The Earliest
Washington (Apr 6) So goes the conventional wisdom at present. That the Federal Reserve wants to raise interest rates is well known. And for good reason they want to raise rates too. However, when to raise rates is the problem. Too soon and we risk a replay (in a different manner, history doesn’t repeat but the hiccups of it have a certain reminiscent flavour) of 1937, when a reasonable looking recovery was choked off by a return to policy normality too soon. Our problem is that we have to change monetary policy 18 months before the appearance of that inflation that we’re changing monetary policy to avoid. Which, given that prediction, especally about the future, is a difficult thing leaves us with a difficult decision.
It’s the Financial Times that is suggesting that the earliest the rate rise will arrive now is September:
“A rise in June — still just possible given the rubric set out by Janet Yellen last month — can surely be ruled out. September is the earliest possible date, and now looks unlikely. Even that would require a clear-cut recovery over the spring and summer. The Fed wants to raise rates, but it is telling the truth when it says it is led by the data.
As for the data, the unemployment numbers had looked isolated for months, with other figures painting a picture of far more muted US growth. Look, for example, at this month’s ISM supply managers’ survey of manufacturing. Data are available for many countries, and all are handily set with a scale where numbers above 50 indicate growth, and below it suggest recession. This allows direct comparisons.
On that basis, the US is slowing sharply. At 58 late last year, it has now dropped to 51.5
The importance of that second number is this. The employment numbers for the US are notoriously unstable. They bounce around month to month and a subject to considerable revisions. We can really only see trend after the third revision and even then only a few months later, when we see more months and their third revisions. This is inherent in trying to measure the number of jobs in something as large and complex as the US economy. Counting 130 million odd of anything, in close to real time, with an error bar of 100,000 each way, just isn’t a simple task. But if we’ve got other numbers that point in the same direction then we’ve supportive evidence. In that the US economy simply isn’t expanding as fast as it was.
We’re getting much the same message from the markets:
“Ahead of the March jobs report, traders are expecting the Federal Reserve to raise interest rates later than ever before.
As of Wednesday’s close, Federal funds futures implied liftoff from zero in the final week of November, according to an index maintained by analysts at Morgan Stanley MS +0.25%. That’s been pushed back from September as of two weeks ago, before the policy-setting Federal Open Market Committee’s March meeting.
The markets can, of course, be wrong, but they are still the best aggregation of general and informed opinion out there. Everyone in those interest rates markets has their own money down and betting on when the decision is going to be: that’s the way you get people to pay attention and peoples’ attention is being paid.
If this were a conventional recovery the Fed would almost certainly be raising rates already. The major number to look at here is the estimate of Nairu, the non-accelerating inflation rate of unemployment. This is around the 5 to 5.5 % level and that’s roughly where unemployment is. So, time to raise rates in order to stave off that future inflation.
Source: Forbes
