Nobody waiting for the Federal Reserve


Despite all, markets make a clear commitment: the Fed is not to increase interest rates until the end of 2015 at earliest.

Why is that?

April’s unemployment rate stands at 6.3%, which means 0.4% less than May’s. Furthermore, the Federal Reserve has been saying since December 2012 that ultra-low interets rates  would no longer be guaranteed once unemployment fell under 6.5%.

Even though bad weather reduced GDP’s growth almost to 0% in the first quarter, it is relevant that the year-on-year rate of October-December 2013 reached 2.7%, while the consulting company Global Applied Macro Research forecasts an increase of 4% in the fourth quarter.

In this context, why is the Fed to hold the price of money at 0%? Is the Fed returning to a philosophy previous to the dotcom and housing market bubbles?

Only time will say it. However, the reasons of the US central bank to hold ultra-low interest rates -as well of markets’ to support them- are solid today.

Firstly, US total employment is significantly lower than before the crisis due to austerity policies. Obama is the first president since Jimmy Carter carrying out a net job destruction at the federal level, more o less equivalent to that of the Spanish administration.

There is a certain paradox that both presidents, who have been pointed to be the most leftist in the last decades, were the ones to reduce the public employees force, whereas the assumed supporters of markets like Reagan or Bush ‘junior’ or the pragmatic Bush ‘senior’ and Clinton were the ones to expand it. It is well-known that one thing is politics and another very different, messages and what citizens receive.

Nevertheless, the government workers’ adjustment has been just one little piece of US public employment. The true reason was that following almost all US states Constitutions, they cannot have public deficit. So, when tax collection falls, they are forced to perform  massive cuts of public employment.

Both factors combined make that US overall working population still stand at 62.8%, more than three percentual points before the crisis started. Additionally there are some trends that surprised experts, such as the fact that women having children postpone now their returning to the labour market for longer than usual. Alan Krueger, professor of Princeton University and also former chief of Barack Obama’s economic consultants, finds it simply understandable.

The result is that US continues to have its growth potential underused. In fact, the country’s economy should create at least 7 million of jobs in order to achieve the same working population figures before 2007. If the number of employees increases by 200,000 monthly- which matches the analysts’ consensus- the US should wait nothing less than to 2018 for having a labour market similar to that of 2007. Therefore, this means a lost decade for the still biggest world economy.

Furthermore, generating employment is not enough. Salaries must increase. April’s figures of job creation was spectacularly good – they grew by 288,000, which represents 34% over expected by markets- but in return the remuneration remained stranded. It is very difficult this way that inflation touches an average of 2%, which is the Federal Reserve’s medium term goal.

This decline of the employment income’s purchasing power is an structural change of all world economies that central banks are suffering, especially the Federal Reserve. Companies at the Standard and Poor’s 500 devoted in 2013 more resources to compensate their shareholders via dividends or share repurchases than to compensate their employees. Beyond ideology, this situation raises a problem: in the US, private consumption means more than three thirds of GDP.

That is another big change since before subprime crisis burst, when private consumption meant 70% of GDP. However, if salaries do not increase, this consumption can grow only by households indebtedness. The same argument explains the housing market. If families income does not go down, it is not very clear that the market can reactivate- despite US people’s willingness, at least in polls- to hold home buying at the same pre-crisis level.

Even though the US housing market has some ‘hot spots’- if not ‘burning’ ones- in cities such as New York, San Francisco or Washington—they were only sold 946,000 units in March, meaning a significant 33% less than the estimates by analysts. No matter the reason- and the moderate increase of mortgages’ interests for a lower bonds purchasing by the Fed is a big reason- the US people are buying houses in a very cautious pace.

Consequently, the US is expected to continue growing at a cruising speed whenever any surprise occurs. For how long?

The most “hawkish” think after the summer of 2015; the most “dovish”… until 2018.

The Levy Forecasting Center says that China’s slowdown could join to the European welness as well as the US moderate expansion in order to eliminate inflationist pressures that can appear in the future, considering that US currently has no any price tensions. This may be sound exaggerated, but it is convenient to remind that the Levy Forecasting Center predicted a drop of housing market ten years ago. As the company was the subject of general scorn, their experts created hedge fund which bet on the bubble burst and yielded by l500% before closing and giving back investments to their partners.

One thing is clear: gains in the past do not imply future ones.

About the Author

Pablo Pardo
Pablo Pardo is Washington DC correspondent of El Mundo. Journalist especialized in International Economics and Politics.

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