Why we don’t have to worry about the Fed raising rates soon…..
by Tom on August 1, 2009
in Market Musings, the Federal Reserve; market musings
Below are “snippets” of an article written by Mark Thoma about a speech that one of the Federal Reserve’s Board of Directors made. A couple of things that are “worth noting:”
- There is virtually no upward wage pressure right now and that type of “non-inflation” is going to keep the Fed’s rates low.
- The situation is not going to change dramatically. This article estimates that it will be well into 2010 before we see the real opportunity for the Fed to start raising rates.
Like I’ve said before, in my opinion, we have 12 to 18 months before rates start heading substantially upward and in my opinion, any debt, consumer or mortgage or business, that isn’t going to be paid off within 2 to 3 years should be moved over to as long of fixed rates as are currently available.
When it does rebound, it will rebound quite dramatically, but that’s not yet…..
Tom Vanderwell
Economist’s View: Fed Watch: More Confirmation of Steady Monetary Policy
The weakness of labor markets has virtually eliminated upward wage pressure, and wages and compensation are steady or falling in most Districts; however, Boston cited some manufacturing and business services firms raising pay selectively, and Minneapolis said wage increases were moderate. Boston, Cleveland, Richmond, Chicago, Dallas, and San Francisco cited a range of methods firms are using to limit compensation, including cutting or freezing wages or benefit contributions, deferral of future salary increases, trimming bonuses and travel allowances, reducing hours, temporary shutdowns, periodic furloughs, and unpaid vacations.Until economic growth is sufficient to propel wages upward, any residual price pressures are likely to be snuffed out by deteriorating real wage growth. Will the job market improve anytime soon? We get a fresh look at initial unemployment claims tomorrow morning, but the July consumer confidence report from the Conference Board indicates that households see a deteriorating jobs picture:
The share of consumers who said jobs are plentiful dropped to 3.6 percent, the lowest level since February 1983. The proportion of people who said jobs are hard to get climbed to 48.1 percent from 44.8 percent.
Lacking a story that leads to strong wage growth in the near – or even medium – term, the Fed is almost certainly on hold at least through this year and likely well into 2010, allowing the size of the balance sheet to adjust according to the needs of the financial markets while keeping interest rates at rock bottom levels.
