Wages Dont Pick Up Federal Reserve Raise Rates - WAFF-TV: News, Weather and Sports for Huntsville, AL

Wages Dont Pick Up Federal Reserve Raise Rates

Posted: Updated:

The US Fed must re-calibrate their estimates after the disappointing first quarter gross domestic product (GDP) reading as the first six months of 2014.

New York, United States – June 29, 2014 /MarketersMedia/ –

The US Fed must re-calibrate their estimates after the disappointing first quarter gross domestic product (GDP) reading as the first six months of 2014 is likely to be flat despite a strong rebound in the second quarter, said Ellen Zentner, Senior US economist at Morgan Stanley. Although the data going into the second half is looking well enough for the Fed to feel optimistic, it’s getting cloudier with prices going up and wages remaining stagnant, she added.

Asked if the Fed is out of sync with the markets, as all leading financial institutions have revised their growth estimates downwards for the year following the release of the first quarter GDP reading on June 19, Ellen said answered in affirmative. Despite the Fed drastically marking down the growth forecast at its June FOMC meeting, it still remains too optimistic for 2014. The US central bank is also overestimating growth for 2015 and 2016, because supposedly the economy will be moving into a rising interest rate environment by then, she observed.

Asked if markets had already factored in the first-quarter reading before Thursday’s official release, thereby removing uncertainties, Ellen answered in affirmative. However, the question now remains what kind of growth rate investors are settling for beyond the second quarter.

Rather than tracking the GDP number, investors should focus on more high frequency data such as monthly job creation, consumer confidence and freight activity. All these data points indicate economic growth is not falling flat in the second half of the year, she argued.

Many economists think the Fed may not be able to raise interest rates as anticipated by markets despite a pick-up in inflation. Asked which component of the inflation data the Fed focuses on that is not reflected by the core PCE, Ellen said the core PCE data doesn’t show the true extent of household leverage. This has been a source of major contention between the Fed and the “mainstream.”

The core PCE is rising at a faster pace than the Fed had anticipated and Janet Yellen was questioned about it at the briefing following last week’s FOMC meeting. She was asked if the Fed could raise rates when wages were stagnant but prices were rising. Janet Yellen said she expected wages to pick up with higher inflation.

However, if wages didn’t pick up, it would increase the downside risk of the consumer outlook. One cursory look into the past policy tightening cycles reveal the Fed doesn’t raise rates when real wages are flat or declining. The May report showed real wages have fallen year-on-year, she noted.

Asked if markets should interpret the latest reading on gauges such as the University of Michigan/ Thomson Reuters’ consumer confidence index as a “recovery” despite readings nowhere close to “normal,” Ellen said it’s important to put all economic indicators in context. The most recent report showed the Conference Board’s consumer confidence measure has risen to 85. In a recovery, 80 is the “normal” level, which the economy passed just a few months ago. That means it took US households five years for just to feel like a recovery. Although consumer confidence is rising, there’s not much response from the households, she noted.

Asked how corporate earnings could grow eight percent this year, Ellen said costs are extremely low by historical standards. Wages and salaries have gone nowhere. The employment cost index, which is Janet Yellen’s favorite gauge for wage growth, has increased about one-and-a-half percent (nominal) year-on-year while average weekly earnings have grown by about two percent from the prior year (nominal). But CPI/consumer price index, which is a gauge for headline inflation, increased more than wages over the same period. That means inflation completely offset the wage growth, she concluded.

About Ulli:
In 2000, and in 2008, in the midst of apparent market expansion, Ulli’s methodology directed him and his clients to the safety of the sidelines just before the beginning of the brunt of the bear market. Ulli has written countless articles on investing and the very popular e-book “How to beat the S&P 500…with the S&P 500”
Ulli provides a rare blend of European sensibility, engineering practicality and American ingenuity to bring a new level of reliability to the often erratic environment of investing. He has applied his intelligence and creativity to refining a dependable method of tracking and working successfully with market trends, and he brings a genuine caring for people to his service as an investment advisor.

For more information about us, please visit http://www.theetfbully.com/

Contact Info:
Name: Ulli Niemann
Email: ulli@successful-investment.com
Organization: Successful Investments

Source: http://marketersmedia.com/wages-dont-pick-up-federal-reserve-raise-rates/52842

ReleaseID: 52842

Powered by WorldNow

1414 North Memorial Parkway
Huntsville, AL 35801
256-533-4848

WAFF Is a Proud Member
of the Raycom Family of Stations


FCC Public File
EEO Report
Closed Captioning

All content © Copyright 2000 - 2014 Worldnow and WAFF. All Rights Reserved.
For more information on this site, please read our Privacy Policy and Terms of Service.