"Likely" Rate Hike News Buoys Stocks

"Likely" Rate Hike News Buoys Stocks

US stocks held onto their gains after Fed Chair Janet Yellen signaled that the Fed would probably raise rates at its meeting this month. The dollar fell while the euro gained on positive economic news. The Mexican peso rallied on comments from Commerce Secretary Wilbur Ross. 

Fed Chair Janet Yellen |
Fed Chair Janet Yellen | Wikimedia Commons CC 2.0

The long suspense about when the Fed would do the first of an expected three rate hikes ended (mostly) with remarks delivered by Fed Chair Janet Yellen just a few blocks from Nadex's office, at the Executives' Club of Chicago. Yellen did not say the Fed would be raising rates or even use the words "rate" or "raise." 

Instead, she said, "I therefore continue to have confidence in our judgment that a gradual removal of accommodation is likely to be appropriate." But everyone knew what she meant. 

More important, perhaps is what that confidence is based on. It means that nearly a decade after the near-crash that precipitated the great recession back in 2007, the Fed is ready to let monetary policy—the manipulation of the money supply and the cost of borrowing and lending—move into the background and allow fiscal policy to take back the driver's seat. 

The Fed had two major economic targets that would allow it to say that the economy was sufficiently recovered to bring lending rates back to historical norms. First, employment would have to be on a steady upward trend based on broad-based job creation. Second, inflation would have to reach two percent, a level that many economists believe allows companies to make sustainable profits without causing negative effects to consumers. It's a number that stands for a whole lot of things happening in concert. 

The two percent number hasn't quite materialized, but an updated Consumer Price Index inflation reading will be published the day of the Fed's decision. They will have time before that to look at the factors contributing to the index and independently estimate what it's likely to be. 

Employment, on the other hand, has been in positive territory for so long that people are almost getting used to unemployment below five percent (for a year now) and steady job creation (the longest streak of job growth in American history). The Fed members had a second consideration in mind, however, which they have alluded to in past statements: median income growth. 

The Fed's economists were worried, as many others were, that the jobs created after a recession are typically lower quality than the ones that existed before it. Many Americans have gotten new jobs, but with lower salaries and fewer benefits. Many factors contribute to this. Of these automation is much bigger than most people realize, and immigration is much smaller than most people think. Whatever the cause, low-wage jobs don't give consumers the kind of buying power they need to be the engine of a free-market economy. 

Recent trends have shown progress in wage growth as well. Despite the transition to a new administration and new economic policies, the Fed has decided that the time has come to begin the gradual return to its usual mandate of maintaining the money supply and controlling inflation. 

This means that the next big economic news, after March 15, is likely to come from Congress or the White House, as the next budget is announced and the president promotes his plan for increased military spending, health care changes, and possibly a southern border wall. Until then, the overall pattern of a long-term uptrend punctuated by short-term dips may continue through summer. 

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