The Fed is about to make a Big Mistake - Again
Last December 2015, the Federal Reserve hiked rates by 0.25%.
Even that was too much. We weren’t prepared. Global markets lost trillions.
U.S. markets lost more than 2,100 points in weeks.
The Fed - which had promised to hike rates another four times in 2016 - quickly backed off of that statement, acknowledging they were too early.
Unfortunately, the central bank is about to make the same mistake again.
The growth the Fed has been crowing about is non-existent.
We were just told that unemployment is 4.6%, and that employers just added another 178,000 jobs in November, bettering expectations.
Image from New York Times
Unfortunately, the underlying reasons sound the alarms.
One, the labor participation rate just fell to 62.7% from 62.9%, which means another 446,000 Americans left the labor force. That’s not healthy.
Also, wages grew just 2.5% in November 2016. However, if we look back at when unemployment was 4.6% about nine years ago, wage growth was 3.5%.
That doesn't make sense either.
If we were near full-employment in the U.S., any slack in the labor market would have been absorbed. As a result, wage growth would be higher.
So why is that happening?
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For one, the quality of jobs is still low. For example, 118,000 part-time jobs were just added for the holiday season in November. Two, the number of multiple jobholders just jumped by 61,000. We’re also seeing incredible increases in the number of waiters and bartenders, too.
In November, we added 18,900 waiters and bartenders.
Meanwhile, the number of manufacturing jobs slipped by 4,000 after a 5,000 decline in October 2016. That’s not growth.
Temporary jobs were also responsible for 14,300 of the 178,000 added jobs.
Still, the Fed wants to act…
Despite GDP weakness, unemployment and wage growth, Janet Yellen & Company want to raise rates this month. In fact, there’s now a 92.7% chance of this happening.
We understand the Fed wants to regain credibility and inch its way out of its corner, but now is not the time to try to be a hero. They’ll crash the market just as they did in January 2016.
A hike could come at another great expense, again.
We’d love to be optimistic about the economy. But it’s tough to overlook the reality the Fed is choosing to ignore for the second time in a year.