The Fed weighs in on economy, opts to stay the course for now
Monday, June 24, 2019
President Trump is not happy with the Federal Reserve Bank under Chairman Jerome Powell. Suffice it to say, the Fed’s interest-rate policy is a source of friction.
The Federal Open Market Committee (FOMC) issued a statement June 19 opting to leave “the federal funds rate at 2-1/4 to 2-1/2%” for now. That rate could change depending on factors such as inflation, or a rise in prices and wages.
“They are trying to make it clear that they will lower rates,” Dean Baker, a senior economist at the Center for Economic and Policy Research in Washington, D.C., told MultiBriefs by email, “probably at the next meeting, if there are more signs of a weakening economy. This is a good sign, since they clearly have reversed course on plans to push rates higher.”
A hike of interest rates ups borrowing costs. That hurts small and midsize businesses to grow.
Meanwhile, there is the bond market.
“On 22 March 2019, the spread between the 10-year and 3-month Treasury yield (10y-3m spread) went negative for the first time since the last U.S. recession that ended in June 2009,” according to Sabri Öncü, an economist based in Istanbul, Turkey. “It remained negative until 26 March 2016 after which it became positive and remained positive until 22 May 2019.”
According to Öncü, “The significance of this is that since World War II, every time a recession occurred in the U.S., the 10y-3m spread went negative shortly (usually 6-12 months) before the recession started, although the reverse has not been the case always.”
What does all this mean? Well, a slowdown of economic growth worries the bond market. For instance, the tit-for-tat trade war between China and the U.S., the two biggest economies on the planet, is a factor that could slow growth.
Against that uncertain backdrop, Republicans claimed that the Tax Cuts and Jobs Act of 2017 would spur the U.S. economy, in part upping workers’ pay. In turn, this would strengthen their buying power for goods and services.
Lawrence Mishel is a distinguished fellow at the Economic Policy Institute in Washington, D.C. He crunched data from the Bureau of Labor Statistics’ Employer Costs for Employee Compensation.
“An examination of overall wage and compensation growth does not provide much in the way of bragging rights for tax cutters, especially given the expectation of rising wages and compensation amidst low unemployment,” according to Mishel.
In standard economic theory, low unemployment boosts workers’ bargaining power to increase their pay. What do the numbers show?
“Private sector compensation and W-2 wages both fell by 0.9 percent over the last year (March 2019 versus March 2018) and were lower in March 2019 than the average for 2017, the year before the tax bill passed. W-2 wages in March 2019, $27.44, were lower than in December 2017, $27.79, a drop of $0.35 or 1.2 percent.”
The FOMC meets again on July 30-31. A reduction in the federal funds interest rate at that meeting would appear to be a response to a slowing economy.
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