Yellen Isn’t Raising Rates Anytime Soon, As Expected…

February 26, 2015 0 Comments

This is a pity, because I was hoping that she would have surprised me for once. Too bad predictability is a trait she shares with the former Fed Chairman, Ben Bernanke. Economist predict that the rapid amount of employment would surge wage growth and increase spending, just enough to increase incomes along with Gross Domestic Product. Unfortunately, outside of the rapid increase in employment, there doesn’t seem to be much evidence of this happening.

On December 28th, 2013, 1.3 million people lost their unemployment insurance because congress failed to extend those benefits in their budget deal. Once this ended, the same 1.3 million people were forced to find some sort of employment to support themselves. While jobs greatly increased within this year, many of these jobs are low wage employment, which is why wage growth has been very nonexistent.

Not to mention, the government is failing (utterly) to raise inflation. In fact, the economy seems to be suffering (for lack of a better term) from falling prices. Far from the inflation target of 2%.

Basic economic theory suggest that producers who face lower prices will naturally cut wages as well. The problem with this notion is that wages don’t always adjust instantaneously, considering that it is economically and financially unpopular to reduce the wages of your employees. If employers are unable to reduce the wages of employees to counteract the reduction in revenue, then employers must reduce employment.

This hasn’t exactly happened yet, at least, not in a general sense. Much of the deflation occurring in the economy is the result of falling oil prices, and mass layoffs appear to be occurring in the oil & gas extraction sector of the economy (if you actually believe those layoffs are occurring).

Most economist have failed to predict when the Federal Reserve will decide to raise interest rates. We’ve heard words such as ‘data dependent’ and ‘patient’ when it comes to ending policy Zero Bound policy, as well as the presumption that rates will rise when the economy growth becomes more stable. However, that sustainability has never arrived. This is why I say that the Fed will probably never raise interest rates. 

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