Fed News – U.S. Labor Market Looks Impressive

September 6, 2015

U.S. Non-Farm Payrolls (NFP), came out on Friday. Once again, the number came close to 200K. And, even though the figure was below expectations (215K), no other Fed news will impress the central bank. Perhaps inflation, though.

Fed News

On top of that, the unemployment rate edged down to 5.1 percent. And most importantly, hourly earnings increased by 0.3 percent. If you combine these three sets of data, is this the Fed news the market expected?

The right answer is the US labor market shows a possible rate hike.

Fed News - What Matters for the Fed to Raise the Federal Funds Rate?

The Federal Reserve (Fed) will find it difficult to delay the first rate hike. The labor market is strong enough.

But there’s still room for improvement. The unemployment rate is back to 2007 lows around 4.5 to 4.9 percent.

And, if the decline continues, the rate will drop below 4 percent. As such, to levels not seen since the Dotcom crash in 2001.

But in the real world, we’ll never reach the absolute ideal figure. Therefore, zero unemployment does not literally means that.

Conclusion

Before the Dotcom Bubble, the unemployment rate was four percent. Back then, the Federal Funds Rate was at 6.5 percent.

After more than eight years of ZIRP (Zero Interest Rate Policy), it is hard to imagine such a figure. But it does not change the fact that once it was perfectly normal.

Moving forward, in 2003 the unemployment rate spiked to 6.4 percent. It marked the top for almost five years.

Back then, the Federal Funds Rate was at 1.0 percent – still considerably higher than it is today. Finally, in 2006-2007, when the unemployment rate was between 4.5 and 5.0 percent, the Federal Funds Rate stood at 5.25 percent.

The U.S. labor market seems ready for a tiny 0.25 percent rate hike in September. If not, look for 2016 to be the start of a tightening cycle.

Capital Properties FX
September 6, 2015

Capital Properties FX