Monetary Policy: The Fed has hinted broadly that it's prepared to raise interest rates again, perhaps as soon as September. But, looking at the economy and following Friday's tepid jobs report, it's hard to see what the hurry is.
Speaking at the Fed's annual Jackson Hole, Wyo., gathering, Fed chair Janet Yellen made clear she's now in the bulls' camp when it comes to the economy.
"In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months," Yellen told conference attendees. She added that the Fed policymaking committee "continues to anticipate that gradual increases in the federal fund rate will be appropriate."
Fed Vice Chair Stanley Fischer upped the ante, saying the Fed might find room to raise rates two times this year. Yet, just one week later, a Bureau of Labor Statistics report showed just 151,000 new jobs for August -- indicating a virtual no-growth jobs market, and not exactly a number you would raise rates on.
Markets reacted after Yellen and Fischer's comments a week ago last Friday, sending fed funds futures for September from a zero chance of a hike to 33% after Yellen made what were interpreted then as hawkish comments.
But a number of things need to be said. For one, the Fed will not be raising rates at an opportune time. With second-quarter GDP being reported at a pathetic 1.1% and slower-than-expected growth still on the horizon, it's not at all clear that rates need to go up right away. Friday's jobs report only confirms that.
We keep hearing we are "at or near full employment" as a reason for hiking rates. This, frankly, is nonsense. Since 2006, the U.S. population has grown from 298 million people to 323 million people, a gain of 25 million, or 8.4%. Over that same time, the number of people who have left the labor force jumped from 76.7 million to 94.3 million, a 23% increase. That's not full employment.
Looked at another way, the Labor Force Participation rate is down from 66.4% at the end of 2006 to 62.8% currently. Unfortunately, the people no longer in the workforce don't get counted in the unemployment rate. If they did, it would be closer to 10% than the current 5%.
Life, as we're often reminded, is all about timing. The Fed had an ideal chance to raise rates in 2013 or 2014 as the economy emerged from recession. It didn't. And now the economy looks rather long in the tooth. This is the worst time to be raising rates, at least in terms of the business cycle.
For the record, we think the zero-interest rate policy was a disservice to savers and distorted markets. But today the economy remains under siege by regulation, higher taxes and the growing burden of ObamaCare. Despite record low interest rates, business investment since 2006 has been sluggish, actually declining now for three straight quarters — a sign of recession. As for the overall economy, IBD calculates GDP is $2.2 trillion smaller than it would have been with even an average recovery.
A rate hike fixes none of this. What would fix it is tax reform, less regulation and repeal of ObamaCare. Sadly, those are out of the Fed's hands.
