NEW YORK (CNN/Money) -
Everyone is getting excited or worried or happy -- depending on your view of inflation and where it's heading -- about the prospect of the Federal Reserve raising interest rates. But maybe we should all stop and take a deep breath, because there are still lots of reasons why the Fed is going to take it's time before it pulls the interest rate trigger, as one key official hinted this week.
Yes, it looks like the labor market has turned the corner, according to the March employment report. And new claims for unemployment benefits have been on a downtrend, notwithstanding the latest unexpected spike up of 30,000 to 360,000 -- the highest level since February and the largest one-week increase since December of 2002.
Inflation numbers yesterday were uncomfortably high, led by rising prices for services, especially medical care (no surprise there). One price that is NOT rising much, however, is the price of labor. Wage growth is still very anemic. There is still a lot of slack in the economy, both in terms of people waiting to get jobs again and excess capacity in factories and all kinds of businesses. Do you think that workers at your company are suddenly in a position to say "Hey boss! Give me a big fat raise or I'm outta here!" Most of us aren't.
If prices for things like gasoline keep marching higher, we will pay those higher prices and inflation will rise. But it will put many of us in a cost squeeze, leaving us with less money to spend on other things. So whatever bulge we see in inflation now may get dampened down. Yes, the Fed is going to raise interest rates. Everyone agrees the key short-term rate can't stay at a 45-year low forever. But if wage growth stays meager, their rate hikes may not come as quickly as the biggest inflation worrywarts are hoping, and the number of increases we see may not match the kinds of increases we have seen from the Fed in the past.
In this light, it's very important to pay attention to remarks from Bob Parry this week, the outgoing head of the Federal Reserve bank of San Francisco. He's been one of the leading "hawks" at the Fed for many years now, which means he's been in the camp that's more inclined to worry about inflation and ready to raise rates pre-emptively to ward off rising inflation. Over the weekend he gave an interview in which he stated the obvious: that rates will have to move higher as inflation moves up, and that got a lot of market pros worried about the timing of rate hikes being speeded up.
But today, he seemed to be signaling that the Fed is still going to be patient when it comes to raising rates.
Parry said he thinks that inflation will remain "relatively well behaved" in the months ahead. Asked by reporters about the bigger-than-expected increase in March consumer prices, reported on Wednesday, he said, "I frankly think it's too early to say what signal is coming from those numbers."
As for the recent run of strong economic numbers -- think of the jump in March payrolls, strong retail sales, better manufacturing reports -- he doesn't sound worried. He said the economy still has a lot of spare capacity (the unemployed people and excess capacity in factories referred to above), and "We'll probably need to see relatively strong growth for a few more quarters before we work off that slack" (my emphasis). And he says the timing of a rate hike fast the economy grows and how quickly the slack is used up.
Despite the March payrolls jump of 308,000, Parry said the performance of the U.S. labor market is still "far below" where the Fed would expect it to be in a typical economic expansion.
To underscore that view, let me show you some numbers from Bob Ried, of Ried Thunberg & Co.
Looking at past recession into recovery periods, Bob calculates the number of jobs created 28 months past the trough of the downturn into the expansion. Coming out of the 1960-61 recession, the economy created 2.9 million jobs. After the 1980-81 recession, 8.0 million jobs were created. Even the previous "jobless recovery" after the 1990-91 recession managed to eke out 2.4 million jobs. And now, after the 2001 recession, the economy has still not gotten back to positive growth on jobs -- there is still a net loss of 320,000 jobs.
No wonder people like Bob Parry are still sounding cautious, even as they make it clear the Fed is watching for the signal that it's time to hike rates.
Kathleen Hays anchors CNN Money Morning and The FlipSide, airing Monday to Friday on CNNfn. As part of CNN's Business News team, she also contributes to Lou Dobbs Tonight.
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