[7]
There has been a lot of speculation about when the Federal Reserve would increase the interest rates and we remain convinced that if the Chinese stock market didn’t move into a freefall, the Federal Reserve would indeed have increased the interest rates.
[8]
Source: Forbes
In hindsight, the Americans should be extremely happy the interest rate wasn’t increased as the economy absolutely was not ready for it. Just a few weeks after the meeting of the Federal Reserve to decide on the interest rates, a worse than expected jobs report came out. One would think an additional 142,000 jobs [9] having been created would be good news, but that couldn’t be further from the truth. 142,000 new jobs actually was a disappointing number as analysts were expecting approximately 200,000 new jobs.
It got even worse. Even the August jobs number had to be revised down from 172,000 new jobs to just 136,000 new jobs and this resulted in the unemployment rate remaining stable for two consecutive months. But let’s have a closer look at this unemployment rate. The unemployment rate is calculated as the ratio of people looking for a job versus the total labor force [10] (which is defined as the pool of citizens older than 16 and willing to work).
[7]
Source: Forbes
So yes, the unemployment rate has been trending down, but the mainstream media seems to be conveniently ignoring the labor force has been decreasing. Whereas 66% [11] of the population in excess of 16 years old was willing to work in 2008, this number has gone down and now only 62.5% of the population is part of the labor force. This does have an impact of approximately 5.5% on the unemployment rate because if the labor force would have remained unchanged, the unemployment rate wouldn’t be 5.1% now, but 5.4-5.5%. So, no, the economy is NOT doing much better because the unemployment rate is going down; the unemployment rate is going down because more people are just giving up on looking for a job.
[7]
Source: Bureau of Labor Statistics
So yes, the situation is worse than it seems, and the possibility of a rate increase is going down by the day. You want evidence? Well that’s pretty simple. Have a look at the next image which shows the 30 day Federal Funds futures [12]as of at the end of Friday.
[7]
Source: CME Group
As there’s just a 0.0575 difference between the contract value for October and December, the market thinks an interest increase is unlikely and the possibility of it happening is estimated at less than 25%. The odds are already looking better for a rate increase before the end of March, as the market thinks there’s a 60% chance the Federal Reserve will increase the interest rates by 0.25% in the first quarter of this year. And if you look further, the market is only fully factoring in a 0.25% rate increase by June of next year!
Truth be told, the hands of the Federal Reserve are tied as the American economy isn’t performing as good as they would like to make you believe. Even more so, they also tied in the state of the global financial system as another factor for their monetary strategy. So, in the end, the Fed is becoming their own problem, which is why the central bank won't raise rates any time soon. Or maybe, never at all, until the market forces the Fed to act.
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