Janet Yellen gave another speech yesterday, and stocks and bonds rallied. So you would think the pundits would applaud her speech. But, no, with approximately half of the Fed Governors saying they want higher interest rates now, many thought she was the Fed party pooper.
She in fact said that with so much economic uncertainty both here and abroad, now wasn’t the time to talk about raising interest rates further. And there is plenty of uncertainty, since our last quarter’s GDP growth was just raised to 1.4 percent from 1 percent, and we might be lucky to achieve 2 percent GDP in Q1 2016.
“Global developments have increased the risks” to the outlook, with economic and financial conditions still less favorable than in December when the Fed engineered its first rate hike in a decade, Yellen said in a speech to the Economic Club of New York.
“Given the risks to the outlook, I consider it appropriate for the Committee to proceed cautiously in adjusting policy,” she said. She didn’t mention a month for when the Fed could lift interest rates.
So why on earth are so many calling for higher rates at this time? How would that benefit growth, and employment? It’s the bankers among the Fed Governors who worry most about another recession. They voiced the fear that with rates so low, the Fed wouldn’t be able to stimulate more growth should we enter another recession.
So in an unexpected twist to the speech, Yellen pushed back on the conventional wisdom that the U.S. central bank would be virtually powerless to respond to a recession given that interest rates are so close to zero. “The Fed would still have considerable scope to provide additional accommodation,” Yellen said.
But where are the inflation fears coming from, with more than 200,000 jobs being created every month, and the unemployment rate at 4.9 percent? An economy has to overheat first, such as during the housing or dot-com bubbles, has to be producing at full capacity with inflation soaring before there’s any danger of a recession.
And inflation is dependent mostly on increasing wages, these days, since wages and salaries still make up two-thirds of product costs. Yet wages are only beginning to rise after being stagnant for some 30 years.
One caveat that may be feeding recession fears is that corporate profits are shrinking, which could mean slowing growth. Pretax profits fell nearly 8 percent in the fourth quarter, and annual profits fell for the first time since the Great Recession, the Commerce Department reported last week.
But Marketwatch reports that David Rosenberg, chief economist and strategist of Gluskin Sheff, in a research note says consumer income leads business income, and not the other way around. Historically, the relationship runs from personal income growth to corporate profit growth by a four-quarter lag.
And the Commerce Department report on corporate profits also showed employment compensation as a percentage of total income on the rise. It’s admittedly rebounding from historic lows, but this growth should ultimately lead households to bolster spending, and that spending will end up in corporate coffers, Rosenberg says.
Then we have this news. Manufacturing may be on the rebound. The Institute For Supply Management’s just released Chicago Business Barometer, one of the major manufacturing indicators, increased a HUGE 6.0 points to 53.6 in March, led by sharp bounce backs in Production and Employment. In fact, I’ve already reported that manufacturing is returning to pre-Great Recession levels.
“Four of the five Barometer components increased between February and March,” said Chicago-ISM, “with only Supplier Deliveries declining on the month. Movements in the Barometer and its components have been volatile over the past few months, while trend growth has remained weak. March’s positive outturn, though, left the three month trend at the highest for just over a year and the Q1 average at the highest since Q4 2014.”
So where is the recession?
Harlan Green © 2016
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