Is a July rate increase back on now because of the strong June jobs report? If not July, then September?
June’s unexpectedly strong 287,000 gain in nonfarm payrolls – more than 100,000 above Street forecasts – has some people believing that the Federal Reserve will now once again change its mind and increase interest rates sometime this summer, either later this month or at its September conclave.
But the bond market isn’t buying it, and neither am I. The yield on the benchmark 10-year Treasury note ended last Friday at a new record low of 1.36%, down eight basis points for the week. That doesn’t sound like bond investors believe that a rate increase is imminent. And it’s hard to believe that the Fed, which won’t make a move unless the sun, moon and stars are in perfect alignment, will suddenly take the big rebound in nonfarm payrolls as the green light to raise rates. It will take a lot more than that.
Despite the bounce-back in June, job growth in the second quarter was pretty anemic. The June gain raised the monthly average during Q2 to only 147,000, which is down from almost 200,000 in Q1. Remember that May’s already dismal 38,000 gain was revised even further downward to 11,000, so the bar for June was set pretty low. Add in the fact that the unemployment rate rose to 4.9% from 4.7%, and there’s nothing in the report to give the Fed any reason to start rate normalization.
Indeed, as the minutes of its June 15-16 meeting show, the Fed seems just as concerned about what’s going on in Europe as it does here.
“Members generally agreed that, before assessing whether another step in removing monetary accommodation was warranted, it was prudent to wait for additional data on the consequences of the U.K. vote,” the minutes said.
Remember, the Fed meeting took place more than a week before the Brexit vote. At that time, surveys and gambling odds both indicated that while the vote was going to be close, “Stay” would prevail. Clearly, the Fed wanted to see if the Brits would elect to leave the European Union or not. As we know, “Leave” won.
We can certainly presume that if the U.K. voted to remain and left the status quo as is, the Fed would have moved on and concentrated on what’s happening – or not happening – in the U.S. economy. Now, with the U.K. actually leaving, the process of Brexiting will take about two years to accomplish, according to some estimates. Does that mean the Fed will need that much time to measure “the consequences of the U.K. vote?”
Probably. That leaves about another two years before the Fed will feel comfortable enough to begin normalization, never mind what happens back here at home.
And that’s not looking so hot right now. The Fed itself believes the economy won’t grow more than 2% per year over the next three years. Employment growth is in a rut. And inflation is still running well below the Fed’s 2% target and shows no signs of rising beyond that.
Plus, we have the election coming up in just four months. As I’ve maintained here before, there is almost no chance the Fed will change monetary policy before the election takes place.
The Fed minutes also revealed some concern about the Fed’s recent topsy-turvy pronouncements on monetary policy.
“Several Fed officials expressed concern that the Fed’s communications had not been fully effective in informing the public how incoming information affected the U.S. central bank’s view on the economic outlook, its degree of confidence in the outlook, or the implications for the trajectory of monetary policy,” the minutes said.
The communications aren’t the problem so much as the Fed continually trying to conduct monetary policy based on constantly aiming at moving targets. Before the May jobs report came out the Fed, led by Chair Janet Yellen, had been prepping the markets that it was about to raise interest rates, only to pull back when the report took the Fed by surprise. Pronouncements since then imply that a rate rise is off the table for the foreseeable future. Is that still the case after the June employment report, or is a rate rise back on?
If you owned your own company, would you constantly set sales and production targets, hire people and place orders when you’ve had a good couple of weeks, then cut orders and lay off workers after a bad month? Of course not. Yet this appears to be the way the Fed runs the economy.
Is it any wonder, then, that companies won’t take the risk and invest in themselves and hire more workers because they’re worried that the Fed will pull the rug out from under them once they’ve committed themselves?
We’ve allowed a handful of supposedly reasoned, experienced, sober economists and bankers to basically run the U.S. economy, yet they seem to be flying by the seat of their collective pants. And the rest of us are being taken for a ride.
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INO.com Contributor - Fed & Interest Rates
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.