Thursday, June 18, 2015

Janet Yellen and Interest Rate Futures

Financial FAQs

The consensus of economists from Fed Chairperson Janet Yellen’s press conference was that the Fed is in no hurry to raise interest rates. Why should they with employment growing, but not wages? Because workers aren’t getting their fair share of the economic pie (i.e., of increases in productivity and profits), and future economic growth still looks dicey.

“I did say when we agreed that labor markets slack has diminished to some extent, in the inter-meeting period and clearly over a longer span of time over the last several years, obviously we have made considerable progress in moving towards our goal of maximum employment,” said Dr. Yellen. “So in spite of the fact that there is some progress on that front the committee wants to see some further progress before feeling that it will be appropriate to raise rates.”

For starters, economic growth is still not sufficient to boost salaries. First quarter U.S. GDP growth was negative -0.7 percent, though it may eventually be revised upward with more data. This is while wage growth in the first quarter was just 2.3 percent, when it is above 3 percent with normal full employment.


Graph: Trading Economics

And there is very little if any inflation because of low wage growth, which takes up two-thirds of product costs. The Consumer Price Index has had zero growth over the past year—yes zero retail inflation, as the Econoday graph makes abundantly clear.


Graph: Econoday

So what is Janet Yellen’s Federal Reserve to do in such a case? It has to continue to wait for a number of economic factors and trends to develop. For instance, Europe is teetering on the edge of its third recession since 2009, and Greece about to exit the Eurozone. The ensuing economic uncertainty can only hurt exports, since Europe accounts for 25 percent of U.S. exports, and our strong dollar is making U.S. exports less competitive everywhere (though it has meant cheaper oil and gas prices, and a lower trade deficit).


Graph: Trading Economics

Europe is definitely hurting, in other words. “The Gross Domestic Product (GDP) In the Euro Area expanded 0.40 percent in the first quarter of 2015 over the previous quarter,” says Trading Economics. GDP Growth Rate in the Euro Area averaged 0.36 percent from 1995 until 2015, reaching an all-time high of 1.30 percent in the second quarter of 1997 and a record low of -2.90 percent in the first quarter of 2009.

“We can only do what is in our power to attempt to minimize needless volatility that could have repercussions for other countries or financial stability more generally and that is to attempt to communicate as clearly as we can about our policy decisions, what they will depend on and what we are looking at,” said Yellen.

She couldn’t be clearer on the need to pay attention to what is happening in the rest of the world as well as with US, in other words.

Harlan Green © 2015

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