ECONOMIC & MARKET INSIGHTS
Federal Reserve’s Perspective Is Largely “Mission Accomplished” By Scott M. Colbert, CFA ®
With a 4.3% unemployment rate and inflation moving towards or hovering around 2%, the Federal Reserve (Fed) is likely giving itself a pat on the back this month for reaching its target goals for the economy. The media widely reports that the Fed is tasked by Congress to operate under a so-called “dual mandate,” which directs the board “to promote effectively the goals of maximum employment and stable prices.” There is a third mandate, rarely mentioned, which calls for “moderate long-term interest rates” as well. All considered, the legislature provides the Fed with a simple roadmap. Despite these three often contradictory objectives, the Fed could reasonably argue it has hit the bull’s-eye, perhaps like never before. And because of its success with the hard data, most market experts believe that the next quarter- point interest rate is a foregone conclusion at the Fed’s June 13-14 Federal Open Market Committee meeting. So why raise rates when everything is coming up roses? Well...unemployment is at a 16-year low. And hourly wages are growing consistently at an annualized pace of 2.5% or better. With unemployment low, wages will typically rise even further, and rising wages generally lead to a bit more inflation. And let’s face it, a sub-1% short-term interest rate and a 3% 30-year-Treasury rate is rather obviously a very favorable interest rate environment. So the Fed wants to gradually reduce what it considers exceptionally accommodative monetary policy while it can and pre-empt a material overshoot of either inflation or employment or interest rates down the road. And economic growth is forecast to actually accelerate a bit over the back three quarters of the year with stock prices hitting record highs, consumer and business confidence elevated and home prices back to precrisis levels. So it’s likely the unemployment rate will continue to drift lower and perhaps put further pressure on inflation. We doubt this will be the last rate move, either. We expect one more move up this year before the Fed turns its attention to its gigantic balance sheet grown by all the additional money it created during the financial crisis. What gives the Feds pause? Job growth has slowed, with last week’s report coming in at about 138,000 new jobs. And the new jobs were also concentrated in lower paying areas, with leisure and hospitality adding most of the positions. Most of the decline in unemployment has simply been because working-age folks are leaving the job force (demographics) as the labor force participation rate edges lower.
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