It seems that the Fed’s FOMC statement was an effort to have it all: “LABOR MARKET CONDITIONS IMPROVED, WITH THE UNEMPLOYMENT RATE DECLINING FURTHER. HOWEVER, A RANGE OF LABOR MARKET INDICATORS SUGGESTS THAT THERE REMAINS SIGNIFICANT UNDERUTILIZATION OF LABOR RESOURCES.” This is Janet Yellen coming clean. She is a labor economist who will ensure that the FED will err on the side of labor and wage gains. The battle cry from the Fed is loud and clear: No RATE RAISES BEFORE WAGE INCREASES.
While most post-FOMC commentary in the media is worthless, CNBC had on former Fed Governor Randy Kroszner and I believe his analysis was perfect. He cited the same language I noted above and indicated that the change in the language on jobs was SIGNIFICANT (the underutilization of labor resources). Kroszner noted that the language change “allowed the Fed to PIVOT from the strong GDP to focus on the labor market, especially the measure of U6.” In Kroszner’s opinion the gap between headline unemployment versus U6 has averaged about 4 percent but it CURRENTLY RESIDES AT 6 PERCENT (12.1 U6 versus 6.1 headline), thus giving the Yellen FOMC a 2 percent gap to close with the zero interest rate policy. This gives Chair Yellen the statistical cover to allow wages to rise for the labor mandate won’t be met until the all those wanting to work are able to find a job.
This leads to my continued opinion that wages are Yellen’s main concern and as the statement concludes: “The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.” If Kroszner and NOTES FROM UNDERGROUND are correct it will show up in the YIELD CURVE STEEPENING and PRECIOUS METALS REGAINING THEIR LUSTER. The Fed’s credibility is certainly on the line as the market will test Janet Yellen.
***Tomorrow’s post will be the last for two weeks as I take a well-earned hiatus. If something major occurs I will post a short note but otherwise I am going to power down so as to recharge. Enjoy and best to all my readers.