The global financial market looks onto what The Federal Reserve’s chairwoman, Janet Yellen has to deliver as a semiannual monetary policy report to the House Financial Services Committee and Senate Banking Committee on Wednesday and Thursday, respectively.
Committee Chairman, Jeb Hensarling will likely wish to promote legislation to audit and reform The Federal Reserves. However, some queries do conquer minds of economists, money managers, and business owners alongside an impatient wait over to hear Janet saying FED regrets its decision to raise benchmark rate by 25 basis points in December, last year.
The global stock markets have shown bearish rates since FED raised interests on 14th December, 2015. Not to mention, the federal funds futures market has all but eliminated the probability of even one additional rate increase this year. However, thanks to fewer policy makers in optimistically admitting their projection of four rate to be rising this year. On a similar note, Fed Vice Chairman Stanley Fischer in a statement release last week stated:
“A modest overshoot” on the unemployment rate – lower — and inflation – higher — would be appropriate in current circumstances.”
QUERY: Keeping this in mind, has the economic outlook really changed that vividly in two short months? Or is it so that the economic forecast errored and the interest rate action was a matter of hasty decision taking?
A DECEMBER INSIGHT: As per Labor Department, the unemployment rate was 20,000 to a seasonally adjusted 287,000 for a week ended 26th Dec, last year. In comparison to July estimates, this time the unemployment rate was at peak – although in recent months the weekly readings for claims have held near a 42-year low. Currently, Reuter’s poll had a forecast claiming a rise to 270,000 in this ongoing week.
At that time, Janet Yellen’s policymaking committee raised interest rates worth 0.25% – the very first hike since year 2006. Unfortunately, the policy was stuck by global financial turmoil: the falling crude cost, stalling U.S economy alongside collapse in bond market expectations regarding rate increments and inflation.
The labor market is contracting – despite a comedown in the pace of U.S. economic growth as well as slowing corporate earnings growth. This might be a reason due to bearish productivity rate, least number of qualified applicants and Americans on employment scale. Not to mention, an important aspect is the bullish wage inflation.
QUERY: Keeping this in mind, does FED really believes that wages drive inflation, that companies passively raise the price they pay for labor in the hope they can pass higher costs along to consumers? How can there be disconnection between FED’s inflation outlook and the public’s, especially in the light of its well-telegraphed expectations? (*The FED has always said that an ex-food and energy measure is a more reliable indicator of the inflation trend.)
No doubt, Deutsche Bank analysts looks onto Yellen in stress patience while waiting to see further improvement on the inflation front given fresh weakness in crude oil prices as well as the tightening of financial conditions from the recent market volatility.
As per Financial Times, the yield on most European countries’ 2- and 5-year sovereign debt is negative. Some US$ 5.5 trillion of sovereign debt bears a negative interest rate now. As when Janet Yellen herself claimed FED to be in charge of everything — including negative interest rates – in case if U.S economy takes a worst turn, what does she assess on the basis of European experience? Is there really a plan B?
