US Federal Reserve Vice Chair Stanley Fischer expressed concerns about the pace of the US economic recovery yesterday in a Stockholm speech about the Great Recession sponsored by the Swedish Ministry of Finance.
Tuesday, August 12, 2014
Fischer's comments focused primarily on the struggles and evolution of the US economy since 2007, questioning "how much progress" the US has made in terms of mitigating risk and stabilizing the economic environment. Fischer identified a few key drags on growth and further recovery, in particular the housing market's "weakness during the recovery period," the negative impact of an austere fiscal policy and the effect of slow growth internationally on the US
The Vice Chair also expressed concerns about the rate of growth in the economy, stating that "productivity growth in recent years has been disappointing. Over the past decade, U.S. total factor productivity growth declined to 1 percent, which some argue may represent the real norm for the US economy."
Labor force participation versus unemployment
Unemployment figures, of course, represent one of the key barometers of economic health. When more Americans find employment, they're better able to pay their debts and purchase new goods and services, which bolsters demand across the economy and can be the start beginning of a virtuous cycle.
However, while the "headline" U-3 unemployment has certainly declined since the dark days of 2007-2009, the labor force participation rate has been on the downswing since 2000, as Fischer pointed out. In 2014, only 63 percent of Americans were counted in the active labor force, a rate comparable to those of the late 1970s.
The aging of the Baby Boomers explains part of this, and that cohort comprises some of the so-called "discouraged" workers exiting the labor force. The limits of the Bureau of Labor Statistics' surveys make it hard to pin down who, precisely, these discouraged workers really are, but some studies, like a 2012 study from the Richmond Federal Reserve, suggest that early retirement of workers older than 55 years plays a role.
Other structural elements come into play, such as the disproportionate percentage of discouraged workers from demographics with unusually high unemployment rates, and the fact that workers re-entering the market after a period of absence may lack critical skills.
Does the market care?
Fischer's comments on Monday will not have as strong an impact as an actual policy announcement from Federal Reserve Chair Janet Yellen, and the markets did not mark any strong response to his statements. However, he did point to the possibility of raising interest rates in the future - something that will eventually have to happen as the Fed tightens its monetary policy.
Raising rates might increase the attractiveness of the dollar and dollar-denominated debt as an investment. On the flip side, such a move puts pressure on inflation hedges like gold and silver, and potentially on the equity markets.
Monetary policy as investor risk
Increasingly, investors live in a world where the fates of their portfolios can be easily determined by the decisions of a single body - the US Federal Reserve. One of the most predictable correlations since the financial crisis has been recurring rises in equities and key commodities when the Fed commits to low interest rates - or better yet, quantitative easing - and the opposing flow into the dollar and US Treasuries on the opposite signals.
Investors may be able to help safeguard a portion of their gains by using Nadex binary options to hedge against either type of policy. Buying bullish options in gold, silver and US stock indices will pay off if those values rise on events in the news.
Conversely, selling options that pay off when the price falls below a given level will hedge against bearish movements in those markets.
Unlike offshore providers, Nadex binary options are fully regulated by the Commodity Futures Trading Commission, and all member funds are segregated from Nadex's own reserves at BMO Harris, a top U.S. bank.
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