Come the December Fed meeting and after the strong jobs report that was recently released, does the Fed have any choice but to raise rates?
The betting in the futures market leans to the side of a Fed tightening, or raising, of rates. But some of the actual economic evidence may seem to indicate that in fact the Fed won’t tighten now or at any time in the near future.
The Fed, as we know, has a dual mandate of stable prices and maximum employment.
Do the numbers concerning this mandate support an increase in rates, even if only a paltry .0025%? A level that may remain in effect for quite some time as, after one raise, the Fed will likely be loathe to raise again anytime in the near future!
From Zero Hedge, ‘Five reason the Fed can’t raise rates‘!
A weak economy
Eight years after the start of the financial crisis and ensuing recession, the US economy struggles to achieve breakout speed. While US job creation supposedly surged by 271,000 last month, over the past three months that total looks less impressive. Furthermore, the jobs being created are of poor quality and labor force participation remains at near 30 year lows.
Inflation numbers continue to run below Fed targets
The Federal Reserve claims that any timing of future moves will be “data dependent,” and one of its key targets has been an inflation rate that runs at nearly two percent over the medium-term. However, the Fed is nowhere near that target even over the short-term. That’s important because inflation targets are at least as important as the more widely-followed employment numbers, to government and central bank planning models.
The Fed can’t risk blowing its credibility
The US economy is now in its seventh year of expansion, which means that the odds of it slipping into recession again, increase every year. If the Fed raises rates in December, it risks accelerating the process, and would quickly find itself needing to reverse course. This would be a huge blow to the central bank’s credibility, which is a key pillar of the fiat money system.
US election next year
While the US central bank is nominally independent it is in fact a political body, as former Fed Chairman Alan Greenspan recently acknowledged. Any Fed moves would thus be interpreted in light of the upcoming November 2016 Presidential election. Central banks have traditionally avoided raising rates in an election year. As such December will represent one of Yellen’s last chances to influence events, without appearing blatantly political. As an Obama appointee, she will want a strong economy next year, and that implies she will want to keep interest rates low.
A balance sheet wind-down would be a better way to tighten
If the Fed really wanted to tighten up the economy, a better and more consistent way to do so, would be in reverse order to the way it loosened things. For that to occur, the Fed would need to start by unwinding its controversial Quantitative Easing asset purchases, which have bloated the Fed’s balance sheet to nearly $4.5 trillion. This would increase longer-term interest rates first, as opposed to short-term rates, which would be a far more prudent course, as it would steepen the yield curve and increase the incentive to invest for the long-term.
Anything could happen
With all of these pressures and data points mitigating against a December rate hike, if the Federal Reserve does act, it will likely be due to developments that are not readily understood by the general public. Possibilities include fragility in the derivatives market, bond fund outflows, which hamper the financing of US debt, or other information which the Fed has access to but does not make public.
Of course that would provide another signal that the Fed needs some real help with its communications strategy.