Without Real Job & Wage Growth, Fed Will Keep Rates at Zero

Posted: Aug 21, 2014 12:01 AM
Without Real Job & Wage Growth, Fed Will Keep Rates at Zero

The Fed released the minutes from its last gathering, and this report should move the market. The big question of the day is: what is the level of internal dissent from official policy and Chairman Yellen? Some market observers think that the Fed is ready to hike interest rates based on the last four times they reversed course. I actually see the exact opposite, as “real” unemployment (U6) is higher than those other times and inflation is officially at its second lowest point.

Rate Hike TriggersU6PCEFed Funds
Feb 4, 199411.43.192.4
March 25, 19979.15.572.3
June 30, 19997.55.121.7
June 30, 20049.51.382.4

Not only is the real unemployment rate too high for the Fed to change course, the composition of jobs is lousy with net part-time jobs gained in 2014 at the expense of full time jobs. In 1968, part-time jobs were only 13.5% of total employment; the number peaked at 20.1% in 2010, but is heading back up and is currently at 19.2%.

We all know the Fed playbook is to print money, make people feel richer, and get people to spend more. Fed policy is simply designed to deter savings and get people to buy stocks and houses. However, individuals are not buying stocks nor houses. Instead since Quantitative-Easing 2 (QE2) began, people have plowed $1.2 trillion into bank accounts, bringing the grand total to $10.8 trillion or 84.5% of annual disposable income. This is the highest ratio in 23 years.

Unless wages begin to soar, I’m stating right here and now that the Fed will not hike rates for at least one year, and that means the Dow Jones has a great chance to rally north of 19,000 (maybe even to 20,000). Of course, there are always other threats including a fresh recession, which would be a bigger indictment of Fed policy than an eventual inflation crisis.