Stronger Economic Growth? Over My Dead Body, Says Janet Yellen
Stronger Economic Growth? Over My Dead Body, Says Janet Yellen by Mike Whitney
The U.S. economy is weak. Very weak. But the Federal Reserve is planning to raise interest rates anyway. Why?
Here’s what’s going on: According to the Atlanta Fed the US economy is expected to grow at a respectable 2.8 percent for the first quarter of 2017 That’s not bad considering that, for the entire year of 2016, the economy hobbled along at an anemic 1.6 percent. Unfortunately, the Fed’s original forecast has been slashed to account for the downturn in the data. According to their current (March 8) calculation, the economy is growing at a meager 1.2 percent. In other words, the already-sluggish and underperforming economy is gradually grinding to a standstill.
This isn’t the kind of environment where the Fed typically raises rates. In theory, lower rates create an incentive for borrowing which boosts consumer and business spending which, in turn, increases growth. Conversely, raising rates, however slightly, has a negative impact not only on rate-sensitive sectors of the economy (Re: Housing) but also on stock and bond markets where investors adjust their portfolios to reflect the rising cost of credit.
The Trump Bump has been the biggest post election day rally in Wall Street history. The promise of giant tax cuts, fewer regulations and $1 trillion in fiscal stimulus has sparked a stock-buying frenzy that has added nearly 2,000 points to the Dow Jones Industrial Average while piling up another $3.2 trillion in market capitalization. Wall Street loves Donald Trump, there’s no doubt about it.
Regrettably, the unexpected stock-surge has thrown a wrench in the Fed’s plan to gradually guide stocks higher avoiding a bond market blowout that could send yields into the nosebleed section wiping out trillions of dollars in equity in the process. The Fed would rather avoid that scenario which is why the FOMC is expected to gradually raise rates to dampen the irrational exuberance that has overtaken Wall Street. So after nearly a decade of flatlining GDP — accompanied by a stock market rally that lifted the Dow from an abysmal 6,547 points on March 9, 2009 to a lofty 20,906 on March 8, 2017– the Fed has finally decided to ease on the brakes, remove the punchbowl, and see if it can regain control over the runaway equities-train.
Following Friday’s BLS report that 235,000 new jobs were added in February, Goldman Sachs economists predict the Fed will hike rates three times in 2017; in March, June and September. That should stop the Trump surge dead-in-its-tracks. Here’s more from the New York Times:
“Employers added 235,000 workers to their payrolls in February, the government reported on Friday, a hefty gain that clears the path for the Federal Reserve to raise its benchmark interest rate when it meets next week.
The official jobless rate fell to 4.7 percent, from 4.8 percent in January, while average hourly earnings grew by 0.2 percent in a report that overlaps with President Trump’s first full month in office.
Although the economic anxiety that helped put President Trump into the White House remains, the official jobless rate is near what the central bank considers full employment — a threshold where, in theory at least, everyone who wants a job at the going rate can find one.”
Of course, the booming labor stats do not account for the millions of people who have left the workforce altogether after failing to find a job in Obama’s less-than-stellar economic recovery. The data also fails to point out that 95 percent of all the new jobs have been crappy, low-paying, parttime service sector jobs that barely keep food on the table let alone put a roof over one’s head. But, whatever.