With the Federal Reserve (Fed) set to make its long-awaited September policy announcement next week, the debate in the media over whether the Fed will announce liftoff this month or in December continues to rage on.
While I believe a December rate hike is more likely, the data support a September rate increase. Indeed, September may actually be too late. Several factors suggest that the Fed may have missed a window of opportunity for raising rates during the past few months. In other words, here’s why the Fed may already be behind the curve.
Reasons the Fed May Be Behind
1. U.S. Jobs Market Recovery
The U.S. labour market is largely recovered. The Fed has achieved its labour market goal, yet we continue to remain at “emergency level” rates. When looking at numerous labour market statistics accessible via Bloomberg, it’s clear that the jobs market has achieved an extraordinary degree of improvement across so many fronts.
Take July job openings data, for instance. Just this week, one of Yellen’s favorite job metrics, the Job Openings and Labor Turnover Survey (JOLTS), showed the largest monthly surge in job openings since April 2010. Meanwhile, recent monthly payroll reports have been consistently strong and show that almost six million workers have been hired over the past two and a half years, more than in the 13 years prior to that combined. Other labour metrics—such as the unemployment rate and economic indicators of wage growth—similarly testify that the Fed’s dual mandate has been achieved beyond reasonable doubt.
In fact, from a structural standpoint, the last two years of roughly 250,000 jobs gained per month have taken a massive number of qualified applicants out of the unemployment pool. This suggests that we should expect a decline from here in gross payroll gains, which may make the Fed’s job more challenging now that it has waited so long to begin policy normalization.
2. How Interest Rates Influence the Jobs Market
Today’s level of rates has little (or no) influence on labour market conditions, certainly relative to a modestly higher rate paradigm. Though the labour market is largely recovered, there are still some pockets of slack in the labour force. But while there are tremendous fiscal initiatives that could be implemented to stimulate the creation of many needed jobs in this country, I don’t believe emergency rates will influence the true remaining employment challenges. Rather, I’ve argued that marginally higher interest rates could accelerate hiring, as more people gain confidence in forward interest income potential and decide to retire.
3. International Events
Global events are overtaking an already largely recovered domestic labour market in terms of policy importance. Ironically, having largely achieved its domestic employment objectives, the Fed now has a host of broader international concerns to focus on, stemming from recent exogenous international events. These events—including China’s currency revaluation, the return of stock market volatility, volatile commodity prices and slowing growth in emerging markets—could justify the continuation of excessively easy policy.
To be sure, we live in a world that always has risks and headwinds. But given the many headwinds to Fed movement today, the central bank could have taken the opportunity to move earlier in the year when the headwinds weren’t as strong and it was being aided by historically easy global monetary policy in Europe and Japan.
Now, the central bank is left with a more difficult set of decisions going forward, as it weighs the costs and benefits of maintaining interest rates at “emergency conditions.”
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, Co-head of Americas Fixed Income. He is a regular contributor to The Blog and you can find more of his posts here.