We don’t have any inside information on the workings of the Fed but our bet is that Janet Yellen and company will start raising short term rates in December. Or at least we think they should. At the last Fed meeting the decision was made to leave rates as is, and the stock market declined. We think the market was saying that it’s time for an increase, and we agree.
We think there are two reasons for this. First – enough is enough, the U.S. economy has been recovering since 2009 and the training wheels ought to be taken off. The recovery has not been as strong as some would like but as they say in the land of the blind, the one eyed man is king. The U.S is leading the way globally today and our slow but steady progress should continue. The economy can absorb a rate increase. Janet Yellen has said it takes about eighteen months for a rate increase to work its way through the economy. Inflation is not an issue now but it could be in the future and raising rates in December, or taking away the punch bowl before the party gets out of hand so to speak, makes sense.
A second reason we favor a rate increase is that the job market, we think, is tighter than it appears. Shown below is what has happened to employment and wages the past number of years. You would think that as unemployment declines, wage increases would start to pick up. They haven’t but they might start doing so in the future. This past month, the year over year increase in average hourly earnings was 2½%, the biggest jump in six years. It was noted in The Wall Street Journal recently that retailers are finding it harder to attract temporary help for the Holidays. They are paying up for people and finding that the pool of workers is shrinking. With the unemployment rate down to 5%, the supply of skilled labor is going to become a bigger issue and we would not be surprised if inflation starts to pick up in 2016. So Janet Yellen, go ahead and raise rates. You have our approval.
