The Fed’s Disastrous Gift

The Fed’s Disastrous Gift
The comic features features Fed Chair Janet Yellen as a contestant on the game show "Who Wants To Be A Millionaire". The audience behind Yellen, which includes former Fed chief Ben Bernanke, are throwing tomatoes at her. Caption for the comic: "After disappointing markets last week, will Yellen make it up to them later this year?" The Federal Reserve's decision last week not to raise interest rates disappointed most market players who were expecting the central bank to hike rates for the first time since 2006. The questions remains whether Yellen and the Fed will make it up to them at some point later this year, or will they delay the move to early 2016. The central bank has two more scheduled policy meetings before the end of 2015, in late October and mid-December.

Did Yellen just get the green light for an interest-rate hike in December?

The Bureau of Labor Statistics reported on Friday that October saw the addition of 161,000 jobs, while the unemployment rate dipped to 4.9%. At the same time, September’s jobs were revised higher by 35,000 — to 191,000 and August’s jobs were lifted by 9,000 — to 176,000.


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Now, I think most of us are willing to say that these headline numbers are largely hogwash. There’s a lot more going on below the surface that we need to consider.

However, there were a few things from the report that caught my attention:

  • Hourly pay ticked higher by 0.4% to $25.92 and is up 2.8% over the past 12 months. That’s the largest gain since 2009, and weak pay has been a complaint that has dogged this recovery from the start.
  • The workforce participation rate improved to 81.6% from 80.6% in September 2015 — but it’s still down from its pre-Great Recession level of 83%.
  • U6 unemployment rate (which also includes part-time workers who want full-time work and discouraged job seekers who’ve stopped looking) dropped from 9.7% to 9.5%. It’s still up from pre-recession levels of 8%, but moving in the right direction.
  • Manufacturing lost another 9,000 jobs, but 57,000 more white-collar financial, professional and business services jobs helped offset the loss.

Sadly, I think Yellen is going to look at that headline jobs number and push forward with a quarter-point rate hike at the December Federal Open Market Committee meeting — but that’s assuming that the market doesn’t implode after the results of the presidential election.

I’ll give you that we need higher rates. These near-zero rates for years on end have been pure poison to our economy, but it’s still too soon.

Growing up in Kentucky, I spent bits of my childhood out on the farm with my grandfather. I’ve walked the fields and seen the tender green shoots poking up through the thick, claylike soil we were blessed with. That’s what this labor report possesses — young, green shoots of progress that could grow into something much bigger and better.

And right now, Yellen and the rest of the Fed governors are standing at the edge of the field. If they lift rates in December, it’s going to be as if they ran over those green shoots of progress in football cleats. The progress we’ve made doesn’t stand a chance … and it’s very likely that it’s going to get significantly worse from there.

Make sure you’re prepared for the Fed’s blunder.

Just a quick aside … Thank you to all the readers who wrote me in regard to the rising use of robots and its impact our economy. I am still going through all the responses, and I’m enjoying the discussion of both sides of this ongoing story. I promise to share some of the replies next week. If you would like to write in about this issue as well, you can email me at [email protected]

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