Inflation: The Price Is Finally Right for the Fed

In January, the US added 238,000 jobs; in September it tacked on 249,000.

The unemployment rate dipped to 4.7% from 4.8% as more people entered the labor force in search of work, while fewer gave up searching for jobs.

The US economy posted strong gains in February – which President Donald Trump will nearly certainly gloat over, and Federal Reserve officials will nearly certainly take as further support for an interest rate hike this month. But while there may be more room for people in certain areas to enter the job market, the Fed’s mandate is for aggregate numbers rather than distributional concerns.

Other areas of job gains were professional and business services (37,000), private educational services (29,000), health care (27,000) and mining (8,000). This makes sense as policymakers remain nervous about the economic consequences of Britain’s preparations to extricate itself from the EU. Last week’s strong jobs report pretty much closed the deal. That figure was likely enhanced by unseasonably warm weather in much of the nation.

In fact the USA had the second warmest February in more than a century – since 1895 (1954 was the warmest) in fact when national weather records started, and the sixth warmest winter on record.

Manufacturers added a strong 28,000 jobs. An estimated $US2.8 billion was pulled out of high-yield bond funds last week as investors anxious that U.S. interest rates are rising at a time when energy and metal prices are under pressure.

All sectors of the economy, with the exception of retail and utilities, expanded payrolls in February. This trend could weigh on hiring in coming months.

Investors responded initially by sending stock prices up sharply Friday.

Omair Sharif, senior USA economist at Societe Generale, noted that there are only three people in the three rate hike camp in 2018 so that if two shift up, the median will move.

Also, every interest rate hiking cycle has ended in a recession and bear market so investor edginess is very understandable.

In addition to these long-term economic shifts, in the short run the Fed also views that there remains little cyclical slack that they can help correct with continued low rates.

After the payroll (data) on Friday – the last piece of data that could derail the hike – and given how well forecast the Fed decision is, I don’t think there’ll be any surprise and knee-jerk reactions. Conversely, the Federal Reserve can get ahead of the curve by increasing interest rates at a pace faster than inflation suggests it should be.

“When rates rise, entrepreneurs relying on credit or relying on customers [who rely] on credit may face additional headwinds”, he said. And wage growth accelerated, with average hourly earnings reg istering a year-on-year gain of 2.8%.

According to economists, wage growth of between 3 per cent and 3.5 per cent is needed to lift inflation to the Fed’s 2 per cent target. The number of part-time workers who would prefer a full-time job but can’t find it remains almost 25 percent above its level before the recession began in 2007. Among post-9/11 veterans, the unemployment rate dropped from 6.3 percent in the first month of the year – the widest margin since last April.

A diplomatic smoothing of the differences would be a relief for investors who are anxious about what the Trump administration really has in store. If you are looking to refinance, you should be able to find five-year fixed rates in the 2.69% to 2.84% range, depending on the terms and conditions that are important to you.

Because the Fed largely reacts to the state of the economy, it’s hard to speculate about the future. Growth is picking up or stabilizing in most European countries as well as in China and Japan.