The recent report on U.S. jobs growth came in stronger than expected. The forecast for new jobs in June was 125,000, but instead the report showed 132,000 new workers being added. This is below the 190,000 workers added in May, but it beat expectations nevertheless. Wages also increased as reports showed average hourly earnings to have increased by 3.9 percent in June. Further reports showed the unemployment rate to be held steady at 4.5 percent for the third month.
In response to this news of strong economic performance treasury yields have increased as investors are worried about inflation. During this week, the rate on the 10-year note climbed 15 basis points. This has been the biggest increase since the 16 point increase in the week of June 16, 2006. The economy has been doing better than expected amid the subprime mortgage crisis. This has given bond holders reason to believe that there is potential for increases in inflation, and thereby, have increased demand for higher yields. If inflation does go higher than the target level, then the Fed is likely to increase interest rates to cool to economy.
On the other hand, Janet Yellen, President of the San Francisco Federal Reserve Bank, has indicated that the Fed should not change interest rates. According to Yellen, the best way to achieve faster growth while maintaining a low level of inflation in the current state of the economy is by keeping interest rates steady. Despite a very robust economy, Yellen indicates that inflationary pressures are not strong enough to hurt the goods and labor markets. She is more worried about future problems that are yet to come from the subprime mortgage defaults.
It is difficult to say where the value of the U.S. dollar will stand in the next two months. There are mixed opinions among investors and policymakers as to where interest rates will be held. The next FOMC meeting is not until early August.
July 6, 2007 No Comments
Will the FOMC keep a neutral outlook on the interest rate, or raise it once again?
In Chairman Ben Bernanke’s semiannual monetary policy report on February 15 he outlined several reasons for the FED not to increase or to decrease the interest rate in the near-term. First, the U.S. economy is showing potential for consistent expansion at a moderate pace over the next year, with growth strengthening, imports increasing, and the housing market becoming less of a burden. Second, the core inflationary pressures are showing signs of decreasing. The primary reason for the decline was the drop in the price of crude oil toward the end of last year, which has led to lower prices for fuel at the pump, inputs for producers, and – thus – final products that you buy at the store. Therefore, since the economic growth is continuing at a moderate pace and inflation abating, the need to increase interest rates does not appear to be there.
Now, whether or not this will hold true will be determined by the data published on key economic variables over the next several months. Based on that data, if we can see steady economic growth and a gradual increase in the core prices paid on goods and services, then the FED should be poised for one more interest hike. The sectors – and corresponding indicators – that we will want to follow are listed below.
Housing Sector: New Home Sales, Existing Home Sales, Rent Increase
Consumer Spending: Personal Consumption Expenditures (PCE)
Economic Growth: Real Gross Domestic Product
Inflation: Labor Compensation, Crude Oil Prices, and PCE
February 22, 2007 No Comments
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