The Trend

Why the Fed is in No Position to Raise Rates

There are renewed fears the Federal Reserve could move to raise interest rates at the December 2016 meeting.

It’s part of the reason that gold prices have slumped from $1,345 to $1,251 in recent weeks.

According to Fed Vice Chair, Stanley Fischer, the latest jobs report was “close” to ideal.

Unfortunately, what the Fed doesn’t understand is that the quality of jobs, as well as jobs growth has slipped considerably, economic growth is still sub-par, and inflation still runs at less than the healthy target rate of 2%.

In September, U.S. employment growth slowed for the third straight month.  Nonfarm payrolls jumped by 156,000 in September, down from a gain of 167,000 for August 2016, sending the unemployment rate back to 5% on the year.

But that 5% is from what’s known as the U-3.

That only includes the total number of Americans unemployed, as a percent of labor force.

However, if we look at the U-6, we get a fuller understanding of what’s really happening because it includes the total number of Americans unemployed in addition to those employed part-time. 

At the moment, it stands at 9.7%... and is nowhere near full employment.

Plus, the quality of jobs has slipped, as well.

For September, the number of full time jobs fell by 5,000 to 142,296.  What’s troubling is that the number of temp part-time jobs soared by 430,000 in a single month.

That’s very telling of how strong the jobs picture really is not…

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Also, of the 156,000 jobs just added, 35,000 of them were filled by secretaries and clerical staff.  Another 30,000 jobs were filled by bartenders and waiters.  Another 22,000 Americans took retail jobs.  And temp jobs jumped by 23,200, forcing the temp participation rate to 2.03%.

So, of the 156,000 jobs, 108,200 were of little quality.

Look, I’d love to be a bit more optimistic-sounding.  But the facts cannot be ignored. 

If unemployment were improving, inflation wouldn’t be stuck at 1.7%, which is still below the Federal Reserve’s healthy target of 2%.

However, there was some good news. 

Hourly wages did rise 0.2% in line with expectations.  Average weekly hours worked also jumped to 34.4 from 34.3 in August, as well. 

So what does this mean to the Fed?

Despite all of the negativity, the Federal Reserve is still fighting to raise rates by December 2016, arguing the U.S. economy is creating enough new jobs.

In fact, the economy has reportedly created at least two million new jobs every year since 2011.  Unfortunately, not all of them were quality jobs. 

At least 1.2 million of the jobs added since 2011 were waiters and bartenders, for example.

According to the CME Group, there’s a 34.9% chance for a 25-50 bps hike for December and a 60% chance of a 50-75 bps hike.

However, given the reality of the latest jobs data, an upcoming change in U.S. leadership, and weak GDP growth of 1.4%, we don't see the Federal Reserve raising rates this year.