The strong jobs report on Friday sent the markets into a tail spin. It increased the likelihood of the Federal Reserve Board (FRB) staying the course.
As the job market strengthens, it affirms the current course the FRB is on to tighten interest rates. This course is driven by the FRB’s dual mandate:
- Bring the economy as close to full employment as possible
- Maintain an inflation level of 2%.
They have been tied together due to their very nature. if employment is full, then spending should be high, which leads to stronger inflation… Enter the FRB… to save the day…
The most recent jobs report fell short regarding the number of jobs added, however came in strong with the overall rate falling to 4.9%. Likely more concerning to the FRB is that wage gains increased more than expected. More wages equal more spending…
The problem with this mandate is that employment is a lagging indicator, telling us how things were, not how they are. As a result, raising rates as we reach ‘maximum’ employment fails to account for the global factors impacting demand, and therefore inflation.
China continues to struggle to find footing and likely will for some time. Oil prices have remained suppressed due to a glut of supply. This glut is also a reflection of weak economic conditions in Russia and much of the developing markets.
The FRB will likely need to modify its current stance in order to permit growth domestically to flourish. Their approach will need to be delicate as to not tamper with consumer confidence. A weak consumer means all bets are off. The course the FRB chooses to lay in coming months will likely determine economic direction for 2016.
For more information:
If you would like to receive this weekly article and other timely information follow us, here.
Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services. Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.
Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.