Notes From Underground: The FED–No Rate Raises Before Wage Increases

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.



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14 Responses to “Notes From Underground: The FED–No Rate Raises Before Wage Increases”

  1. Alex Says:

    Thanks for your work Yra. We like you in London, always a good read.

    Have a great holiday. Alex

  2. Ron Ferrill Says:

    I just don’t get why Fed would be setting barriers based upon something that is not within the purview of the government (or should not be). Wages are part of the free market, and while I was not the best during my career of understanding and taking advantage of this point, I did benefit from it and some diligence in my work (min 60 hour weeks, and many 80+, and driving constantly for results that drove economic value creation – even before Stern-Stewart). Should we be worried that Fed is heading in these directions?

  3. yra Says:

    Ron–I think it is a major concern.Again,the econometricians believe they practice rocket science but they are mere theoreticians and don’t know how to escape from the capsule and HOPE for a soft landing but where it lands —-a potentially very dangerous scenario.As Druckenmiller so wonderfully said–at least I know where I am wrong—the danger for us is that the Fed has no such idea.Academics just don’t think about where they are wrong–see Jeffrey Sachs in tomorrow’s FT as a perfect example of academic hubris

  4. kevinwaspi Says:

    Academic Mantra: “Imagine a perfect world, then operate as if it exists.”

  5. ShockedToFindGambling Says:

    Yra- I agree with you on what Yellen is thinking, but her reasoning is counterproductive.

    Should the FED lose credibility (which appears to be happening as bonds start to break), the entire recovery, built to a large extent on sub-normal interest rates, will be endangered.

    Pursuing policies that may start a panic in the bond market, is far too dangerous a game to play.

  6. yra Says:

    Shocked–absolutely right in the analysis but academics don’t accept being wrong and exit strategies—even Marx challenged Proudhon in the “Poverty Of Philosophy”

  7. ShockedToFindGambling Says:

    Yra- Anyone who cannot accept being wrong and exit strategies should not be on the FED Board.

    The FED economic forecasting record is atrocious.

  8. asherz Says:

    There is a progression from Proudhon to Marx to Lenin (destroying the capitalist system by debauching the currency) to the Fed. QE may end in October but if the economy falters, guess what? Competitive devaluations globally does not have a happy ending.

  9. GreenAB Says:


    ->heck this is two incentives for coporate America NOT to raise wages: 1)don´t increase your running costs by raising wages 2)don´t give the fed fed a reason to hike rates which would make your debt service more expensive

  10. yra Says:

    Green AB–good to hear from you and that is such a cynical outlook–but it has validity

  11. ShockedToFindGambling Says:

    Not being reported widely, but the Chicago PMI had it’s biggest monthly drop today since 2008.

    Everyone is talking higher rates caused by expected higher inflation and a FED that puts labor growth ahead of inflation, but maybe that’s not the real story today.

  12. yra Says:

    Shocked–good point but really pay attention to what Kroszner said yesterday and the pivot away from growth to wages–I believe that is critical–will wait for market to confirm for me

  13. ShockedToFindGambling Says:

    Yra- I must be stupid, but I don’t get it.

    If you get growth, wages will raise if appropriate (labor shortage).

    If you try to jerry-rig wages higher, you just create a host of new problems.

  14. yra Says:

    shocked –that is indeed correct—but jerry-rig will not work but just create pressure on profits

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