The Federal Reserve: To Hike or Not to Hike?
If you thought the chaos was bad leading up to the U.S. elections, wait until December.
That’s when the Federal Reserve is very likely to raise interest rates by a quarter point. And if that happens, we could see a repeat of the incredible sell-off we saw in January.
The Fed is under the assumption that all is well in the economy.
And by some accounts, it is.
Not only did the U.S. government report that GDP expanded at a 2.9% pace in the third quarter of 2016, but unemployment dropped under 5%.
In fact, it fell to 4.9% -- down by nearly half since 2009 when the number peaked at 10%.
Unfortunately, those are headline numbers. They hide problems.
You see GDP growth came without acceleration in consumer or business demand.
Unemployment improved because another 425,000 Americans left the labor force, and no longer counted. That means the number of unemployed Americans now sits at 94.6 million.
In reality, the Federal Reserve has no argument for higher rates.
And unfortunately, the new unemployment rate of 4.9% doesn’t tell the full story.
The number is based on the U-3, which only includes the total number of Americans unemployed, as a percent of labor force. It’s the U-6 that gives us a fuller picture of unemployment, and includes discouraged workers. That figure currently stands at 9.5%.
There was some good news, though.
Hourly earnings jumped by 10 cents to $25.92. For the year, wages have risen 2.8%.
It’s not a bad number at all. Nothing to complain about on the headline number...
In fact, it’s the best since 2009 when the Great Recession ended. Hooray!
That’s another positive force that could push the Fed to act in December.
However, there are problems with the wage growth report, according to The Wall Street Journal, which notes:
“The 2.8% gain is for all employees. For ‘private-sector production and nonsupervisory employees’ the gain was only 2.5%. On a weekly basis, it the gain for this group was 2.1%. Why does that matter? Well, ‘private-sector production and nonsupervisory employees’ is a group that comprises four-fifths of the entire work force. In other words, a small sliver of the work force saw those larger wage gains. For the vast majority of American workers, wage growth is still anemic, barely outrunning official measures of inflation, which was 1.5% in September, according to the most recent CPI report.”
Despite all of these facts, the Federal Reserve is still fighting to raise rates by December 2016.
It’s arguing that the U.S. economy is creating enough jobs, and that inflation could run higher.
That’s what’s also adding to the fear out there. It’s not just the election or the potential OPEC failure. And if it helps you breathe easier, consider this. According to the CME Group, there is only a 33.2% chance of a 25-50bps hike by December, and a 66.8% chance of a 50-75bps hike.
Those are still low odds. Whatever may happen, just remain calm. All will be fine.