Janet Yellen recently said she is encouraged by tentative signs that wage growth is picking up, adding that such indications are “not yet definitive. We have seen an increase in the growth rate of the employment-cost index, and the growth of average hourly earnings. I would call these tentative signs of stronger wage growth. I think it is not yet definitive, but that’s a hopeful sign.” Yellen said that the rise in wages is encouraging. Wages for private-sector employees rose 2.8% in the past 12 months, the biggest gain in more than six years. The U.S. jobless rate stands at 5.5%, down from 6.3% a year earlier. Does she really believe those unemployment numbers? The FOMC has said it will raise interest rates when it sees further labor-market improvement and is “reasonably confident” that inflation will rise to its 2% goal over time. Yellen said she wants to see “additional strength in the labor market, but there has been progress.” The Fed’s favorite price gauge, based on the personal consumption expenditures index, is up 0.1 percent from a year earlier. Not impressive. CONCLUSION: Chairwoman Yellen sounds like the captain of Titanic telling passengers everything is fine and to continue dancing…while the boat is taking on water. Yellen would love to get the Fed out of the ZIRP (zero interest) corner they got themselves into, but she knows the economy is too weak to risk it. Deflation threatens. And no one can predict if the financial markets will encounter severe turmoil when the Fed does hike rates. Does she really want to risk aborting the economy and entering a recession, especially if Q4 growth in GDP is negative, causing the word “recession” to be heard? The bottom line: unless the economy shows true strength soon, not that declared by Washington’s statistics, the Fed will not be able to hike rates. In fact, the next important action by the Fed could well be to implement another stimulus. But it would probably be done quietly so that nobody notices the egg all over their faces. Remember: there is always a big difference between what the Fed should do and what it will do.
So in your analysis you are agreeing with what she is saying. They are in a borderline situation where they don´t yet need to raise rates because employment data and inflation is not forcing it, at the same time growth is on the slow side and inflation is not near their target of 2%, so it is probably better they don´t raise rates or risk pushing us into a recession. It is a hard pill to swallow, but employement, inflation and growth are all at a point where ´do nothing´ is the best medicine. They should just hold the line and wait to see what happens next. They are at a perfect spot, slow steady growth, low inflation and improving employment data.
They should have gotten us off of this zero interest rate, emergency situation "crack cocaine" years ago. We should have gone up to a quarter point a long time ago - and most smart people like Bill Gross, Carl Icahn, Stan Druckenmiller, and many others pretty much all agree with this. Not saying we should be at 5% now, or even 2%, but c'mon! I've become convinced that Yellen is weak, the Fed is overly politicized, and they are determined to try to stay at zero until Obama leaves office.
