Yesterday we discussed how June’s positive jobs report has many economists thinking that the Federal Reserve will raise its benchmark federal funds rate sooner than they previously anticipated. The general consensus before the jobs report was released was that the Fed would raise rates in mid-2015. However, after the jobs report was published, many economists pushed their projections forward with some now expecting an increase to take place by March of next year. Now further investigation has revealed that not all economists are on the same page with respect to when the Fed will raise rates, and some are sticking to their original projections of a mid-year increase for the time being.
June’s Jobs Report Leads to New Projections
According to the latest date from the Department of Labor, the economy created 288,000 jobs in June and the unemployment rate fell to 6.1%, its lowest level since September 2008. Many economists lauded these figures and expect the Fed to raise interest rates sooner because of them. For example, John Ryding, the chief economist at RDQ Economics in New York said that “If the Fed does not adjust its guidance, it will make a mockery of the notion of data-dependent policy.” This sentiment was echoed by Rick Rieder, the chief investment officer for fundamental fixed income at BlackRock Inc. According to Mr. Rieder, “The Fed will move faster than people think because the data is extraordinarily compelling.” A number of other economists have expressed similar views seemingly indicating that it is now a foregone conclusion that the Fed will raise interest rates before the middle of 2015. However, other economists who have analyzed the jobs data have taken a decidedly different view of the situation.
A Different Opinion
According to these economists, the key metric in analyzing the timing of interest rate increases is wage growth, not the unemployment rate, and wage growth has only improved slightly in recent months. For example, wages have increased by only 2% during the past 12 months and grew at the significantly smaller rate of .2% from May to June. This has Fed watchers like Pacific Investment Management Co.’s Bill Gross thinking that the Fed will keep rates low until wages increase at a faster rate. Mr. Gross made his opinion clear in a recent interview when he said that “It’s actually the wage number that is critical and the jobs that takes second seat. In order to get to the 2% inflation target that the Fed wants to get to, assuming a 1% productivity number, you are going to have to see wages at 3% plus. So the Fed is willing to stay put here.”
Some economists think that the Fed will raise interest rates sooner rather than later because they believe that higher rates are necessary to keep inflation from exceeding the Fed’s 2% target level. In contrast to this view, Mr. Gross and others in his camp believe that while prices for some consumer goods have risen slightly recently, the Fed does not need to raise interest rates to stem the risk of excessive inflation because slow wage growth will do it for them. Consequently, the Fed isn’t under as much pressure to raise rates as many economists think, and the markets seem to agree with this view as Bloomberg has reported that the “implied yields on federal funds futures contracts traded on the CME Group Inc. exchange “foretell” the funds rate will be .78% by the end of next year and 1.81% by December 2016.” These figures are even less than the Fed’s own projections of 1.13% by the end of next year and 2.50% by the end of 2016.
It’s difficult to tell which group of economists has a better read on the Fed’s mindset right now. It’s likely that different members of the central bank agree with different economists and that more economic data is needed before the Fed makes a decision. The Fed didn’t panic when first-quarter GDP was revised downwards from an already scant .1% to negative 2.9%, and it’s unlikely that it will become overly exuberant after reviewing the latest jobs data. The Fed’s next meeting is scheduled for later this month and we will have a better idea of its view on the jobs report and its effect on monetary policy at that time. Until then, before the Fed does decide to raise interest rates and increase the cost of borrowing for businesses and investors, senior housing providers who are interested in obtaining inexpensive capital for growth, acquisitions, or other purposes should continue to look to the Chicago-based financing firm Cambridge Realty Capital and its many different financing programs for their capital needs.