2 Types of Reasons Why the Fed Won’t Hike Rates

Advertisement

I must stress that I do not expect any Federal Reserve key interest rate increase in either 2015 or 2016, due to faltering economic data and intense political pressure.

Federal Reserve Operation Twist

Let’s analyze these economic and political factors.

The Economic Reasons

Weak labor market. As far as the economy is concerned, the Fed has its hands full with its dual mandate. First, it is expected to promote maximum employment; second, it is expected to maintain stable prices. Fed Chairwoman Janet Yellen, who is a labor economist, takes the employment mandate very seriously.

In addition to the Unemployment Rate report, Yellen also keeps a close watch on the Labor Market Conditions Index — a 19-component labor index which fell close to a three-year low in April.

To put it in technical terms, the labor situation is complicated. Many of the new jobs being created are temporary jobs. So, when a worker gets two temporary jobs, this gets counted twice.

For this reason, the payroll survey reported more jobs than the broader household survey for a time. The double accounting of temporary jobs was acknowledged by the Federal Open Market Committee (FOMC) in 2013 and was the main reason why the Fed did away with its official unemployment target.

Unfortunately, history is repeating itself. So far in 2015, the Labor Department’s payroll survey has created far fewer jobs than the broader household survey. Furthermore, the payroll survey has been revised down every signal month in 2015 (January, February and March). These revisions would always happen after the Labor Department matched up social security numbers and corrected the double accounting.

As an example, the March payroll survey was revised down sharply to just 85,000, down from the initial estimate of 126,000.  To add insult to injury, the broader household survey reported that 146,000 jobs were lost in March.

I should add that in April, ADP reported that only 169,000 private sector jobs were created in April, down from a peak of 284,000 in November.  This represents the fifth straight monthly decline in the ADP payroll figure. This is troubling because the ADP report is generally more reliable than the Labor Department’s payroll report (for the reasons I just mentioned).

Finally, labor force participation remains at a 37-year low. Clearly, the labor market still has areas of weakness, and this will undoubtedly deter the Fed from raising key interest rates anytime soon.

Deteriorating economic data. As if this weren’t reason enough, recently there has been wave after wave of deteriorating economic data. In March, the trade gap widened to $51.4 billion, the highest level in seven years. Imports surged 7.7% to $239.2 billion, while exports rose just 0.9% to $187.8 billion. The strong dollar and the West Coast port slowdown are clearly hindering exports.

To put it plainly, the March trade report was horrendous, and I expect that the Commerce Department will revised the first-quarter GDP estimate lower as a result.

Unfortunately, that’s not all. The Commerce Department recently announced that retail sales were unchanged in April as gasoline and auto sales declined 0.7% and 0.4%, respectively.  In the past 12 months, overall retail sales have increased just 0.9%; this is the slowest annual pace since October 2009. Excluding gasoline prices, retail sales have risen 3.6% in the past 12 months.

Consumers’ reluctance to spend their gasoline windfall on other items is perplexing economists. There are a few possible explanations. First, the Fed recently reported that last quarter consumer use of credit cards fell by the largest amount in four years. So, it’s possible that consumers are limiting their spending because they are reluctant to incur more credit card debt.

Second, the May University of Michigan consumer sentiment index plunged to 88.6, down from 95.9 in April. The consumer expectations sub-index fell from 88.8 in April to 81.5 in May. Clearly, some consumers expect things to worsen over the next several months.

Regardless, consumer spending remains a big concern because it accounts for nearly two-thirds of overall economic growth. Many economists were hoping that the slowdown in consumer spending was due to severe winter weather, but it appears that recent consumer caution may be a longer-term trend. Between employment concerns and consumer reluctance to spend on big-ticket items, this is a problem that will likely hang around.

And, at the risk of coming off as a Debbie Downer, there is other bad economic news.  The Fed recently revised industrial output lower for the past few months, So, industrial output has officially declined for five months in row. Most recently, industrial output pulled back 0.3% in April.

The U.S. dollar once again is behind the decline, and cuts in the energy sector aren’t helping matters either. Due to ongoing problems with industrial production, most economists are expecting less than 2% annual GDP growth for the remainder of 2015.

To summarize, the “data dependent” Fed is dealing with wave after wave of bad news, including downward payroll revisions, a ballooning trade deficit, slowing retail sales, reluctant consumers and declining industrial production. And then there’s the deflationary environment.

In April, wholesale prices fell 0.4%, as food prices declined 0.9% and energy prices plunged 2.9%.  Excluding wholesale food and energy prices, the core Producer Price Index (PPI) still declined 0.2%. The PPI has now fallen for five of the past six months, and seven of the past nine months. In the past 12 months, the PPI has declined a record 1.3%.

If the Fed were to raise rates right now, this would boost the U.S. dollar even more and drive down commodity prices. In short, the Fed cannot raise key interest rates without incurring more deflation risk.

The Political Reasons

OK, I’m finally done talking about the economic forces putting pressure on the Fed (for now). Let’s briefly discuss the political forces at work. As we all know, 2016 is a Presidential election year.

The Fed is historically very reluctant to raise key interest rates in a Presidential election year, especially when the economy is sputtering. And this election is already expected to exert a lot of pressure on the Fed to not raise rates. In Janet Yellen’s most recent Congressional testimony, she was essentially asked by leading Democratic senators to not raise rates until wages start rising.

Senator Chuck Schumer was one of the most outspoken and proclaimed, “Wage growth needs to be a major factor…for the Fed when it’s deciding whether to raise rates.”

Translated from Congress speak, until the middle class recovers and wages resume rising, there is tremendous pressure to keep rates near zero.  Furthermore, the Federal Open Market Committee is now dominated by “doves” that are sympathetic to Senator Chuck Schumer, Elizabeth Warren and other outspoken Democratic leaders.

The “hawks” of the FOMC are a silent minority because the most outspoken hawks retired in early 2015.  My prediction is that the Fed will succumb to this intense political pressure from the left, which will only get stronger in 2016. After all, there is a slew of weak economic data to back this up.

So, when I say that the Fed won’t likely raise rates through the end of 2016, I mean it. And for all of these reasons, I just don’t buy into all of this bubble talk.

The upside of all of this poor economic data is that the stock market will continue to melt up as corporate America continues to take advantage of the low interest rate environment. Between relentless stock buybacks — which boost earnings per share and mergers and acquisitions — this is a good time to be a stock investor.

Louis Navellier is a renowned growth investor. He is the editor of five investing newsletters: Blue Chip GrowthEmerging GrowthUltimate GrowthFamily Trust and Platinum Growth. His most popular service, Blue Chip Growth, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.

More From InvestorPlace


Article printed from InvestorPlace Media, https://investorplace.com/2015/06/interest-rates-the-fed-yellen-labor/.

©2024 InvestorPlace Media, LLC