U.S. Bond Market Week In Review; The Most Telegraphed Rate Hike In History

To no one’s surprise, the Fed raised rates 25 basis points this week,offering the following assessment of the economy:

Information received since the Federal Open Market Committee met in October suggests that economic activity has been expanding at a moderate pace. Household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further; however, net exports have been soft. A range of recent labor market  indicators, including ongoing job gains and declining unemployment, shows further improvement and confirms that underutilization of labor resources has diminished appreciably since early this year. Inflation has continued to run below the Committee’s 2 percent longer-run objective, partly reflecting declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation remain low; some survey-based measures of longer-term inflation expectations have edged down.

There is little debate about domestic demand (household spending, investment and housing); it remains strong. But there are moderately strong counter-arguments to several  Fed assertions, beginning with employment.While under-employment has improved, utilization remains below its pre-recession peak:

And the Hornstein-Kudlyak-Lange Non-Employment Index (NEI), provided by the Richmond Fed, is slightly over 8%, indicating a fairly high amount of labor slack:

Both measures are improving. But the higher level of under-utilization raises questions about the Fed’s timing. (But, see this from the KC Fed, indicating employees are more confident in their job hunting prospects).

The low level of inflation presents a second problem. The majority of the Fed Presidents argue that oil prices are the primary reason for weak prices. However, Fed President Evans and Brainard recently proposed an alternate, far more nuanced, thesis:

But inflation has been stubbornly low, even excluding energy prices. Over the 12 months ending in August, core PCE prices, which exclude the often volatile categories of food and energy, increased 1.3 percent, and the 12-month change in core prices has been around 1-1/4 to 1-1/2 percent since the beginning of 2013.

Print Friendly, PDF & Email

Author: Travis Esquivel

Travis Esquivel is an engineer, passionate soccer player and full-time dad. He enjoys writing about innovation and technology from time to time.

Share This Post On

Submit a Comment

Your email address will not be published. Required fields are marked *