Bill Rapp here with the Heartfelt and Hot in Houston Blog, and this is our newest segment: The Fed Lowers InterestRates?
The Federal Reserve has three objectives for monetary policy; maximum employment, stable prices, and moderate long-term interest rates. The first two get most of the attention probably since the third one helps to influence the first two and they are the ones that impact consumers and businesses the most. On Thursday the odds had been in favor of a 50 basis point decrease to the Federal Reserve’s Target Rate vs. 25 basis points, 60% to 40%, after New York Fed President John Williams gave a speech. However the Fed reached out to the Wall Street Journal to say his talk was academic in nature and not about the upcoming Fed meeting on July 31. Per the CME Group as of Friday the market is more inclined for a 25 basis point reduction by 75.5% to 24.5%. The Fed Lowers InterestRates?
The Fed seems poised to lower rates on July 31 even though they are close to historically low levels, retail sales continue to be strong, unemployment is around all-time lows but job growth is slowing and inflation has not been too high or too low.cHowever, the economy is showing signs of weakness as seen in recent PMI reports, detailed analysis of March quarter’s GDP numbers and railroad traffic making a significant downward move over the past two months. If the economy continues on this path it could enter a recession when few are forecasting one with one reliable indicator foreshadowing a downturn in the next 6 to 18 months. It could become a self-fulfilling prophecy as almost 70% of CFO’s are predicting a recession by the end of 2020. The Fed Lowers InterestRates?
However, there are 4 reasons the Fed should not lower its target rate on July 31. There is a companion article on the 11 reasons it should lower them.
Strong job growth has led to low unemployment
The U.S. Bureau of Labor announced that the economy added 224,000 jobs in June vs. expectations of 160,000 and May’s revised result of 72,000. The 224,000 is still strong, but there were revisions to April and May that subtracted 11,000 people hired in those months and government employment added 33,000. Overall private payrolls added 191,000 employees. What is important to know is that the economy only needs to create between 60,000 to 80,000 jobs per month to absorb the number of people entering the workforce. The unemployment rate is also at historically low levels at 3.7%. While it may not fall much further, the Fed is forecasting only a slight uptick in the rate over the next year or two. In theory the Fed should not have to cut rates to help employment when the results and outlook are strong. One statistic to keep in mind is that during Trump’s 29 months in office there have been 5.613 million jobs created or 194,000 per month with those results being helped by the tax cut. Working back from January 2017, Obama’s last month in office, there had been 6.423 million jobs added or 221,000 per month. The difference for the 29 months is 810,000 more jobs or 27,000 more per month than Trump. The Fed Lowers InterestRates?
There are more job openings than unemployed people
The U.S. Department of Labor’s JOLTS report, or Job Openings and Labor Turnover Survey, includes information on how many job openings there are and compares it to the number of unemployed people. As can be seen in the graph below there are more job openings than people that are looking for work, and it has been this way since March last year. Even though there are challenges in getting all the job openings filled ranging from skills and geographic issues, this is another indication that the Fed should not have to cut rates. The U.S. Bureau of Economic Analysis or BEA released its third estimate for March Quarter’s GDP and an estimate for gross domestic income. The reported 3.1% growth was good and rebounded from 2.2% in the December quarter, however, it showed that the “real” economy of personal consumption and business investment is growing at just over a 1% rate, and that gross domestic income growth has slipped to 1.0%. In theory the Fed shouldn’t have to lower rates if the economy would continue to grow at a 3% or so level. However, the Fed is forecasting that GDP growth should slow down to about 2% in 2019 and 2020 so if it does it is to get in front of a slowing economy. The Fed Lowers InterestRates?
Consumer spending is strong
Retail sales rebounded in June and the quarterly gain was the strongest since 2005. Capital Economics said, “control group sales surged by 7.5% annualized in the second quarter as a whole, the strongest gain since 2005. This suggests that real consumption growth accelerated to 4.0% annualized in the second quarter, from 0.9% in the first.” It added, “Rather that reflecting a new burst of economic momentum, however, the recent strength of retail sales should really be seen as a recovery after a period of severe weakness at the start of the year, both of which were partly driven by the plunge and subsequent rebound in the stock market.”
While the consumer may be the only part of the economy that is doing well, since it is about 70% of the economy it doesn’t look like it needs a rate cut to perform at least marginally well to better than average. If the stock markets were floundering it may make sense for the Fed to cut interest rates. However with the Dow and S&P 500 indexes within 1% of all-time highs and above average valuation metrics, the markets really don’t need that much juice. If the markets were to move significantly higher after a rate cut without a corresponding increase in earnings (which probably won’t occur with a cut), it could lead to a bubble and subsequent negative psychological impacts if it were to lead to increased volatility. While the Fed has raised interest rates from a range of 0.0% to 0.25% in December 2015 to 2.25% to 2.5% in December last year, they are still at historically low levels. In the graph below it shows that before the past 9 recessions going back to 1957 the Fed’s target rate has always been above where it currently is. If the Fed decides to lower them next week it will lose some flexibility when a recession finally occurs. The Fed Lowers InterestRates?
The Fed is supposed to be an independent institution so that politicians don’t sway it to make decisions that are not in the best interests of the country. The Fed Lowers InterestRates?
That is all for today folks from the Heartfelt & Hot In Houston Blog, make it a great day!
The inspiration for today’s edition came from this original article: https://www.forbes.com/sites/chuckjones/2019/07/23/9-reasons-the-fed-should-not-lower-interest-rates/#114574da6207
If you are seriously considering moving right now you need to take action right now and talk to a reputable Real Estate & Mortgage Broker today, please call 281-222-0433 or visit: