Economy: The Fed`s Indecision Is A Mistake

(Drivebycuriosity) - Today the Fed decided to keep her interest rates unchanged - for now. I believe this is a mistake. This indecision will continue the uncertainty which has been troubling the financial markets for months. I think the markets will stay nervous as they are. No wonder that the US stock market (S&P 500) closed in red today.

An interest rate close to zero is appropriate for a recession, but doesn`t fit to the economic expansion we now have. The Fed acknowledged the advances, but it looks like that Janet Yellen & Co. were spooked - or even taken hostage - by the recent turbulences on the financial markets. A moderate interest rate hike could have calmed the markets, because mostly expected and would have seen as a sign of confidence. Today`s indecision might continue the turbulences.

It seems that the master of monetary policy are too concerned about Europe & China, but Europe´s economy is recovering (which is reflected in a climbing Euro exchange rate  businessinsider) and China`s industrial production (plus 6.1%), retail sales (plus 10.8%), electric power use & rail freight were all growing faster in August than the month before - no signs of a hard landing (driveby).

The Fed mentioned the low inflation rate. But the headline number (plus 0.2%) is misleading. The core inflation rate (ex energy & food) is 1.8% and might rise in the coming months, because the US labor market is getting tight: Weekly jobless claims are on a historical low level (bespoke), the job openings are on record high (stlouisfed), the unemployment rate dropped to 5.1% (economics)  and wages started to climb (marketwatch). It is highly likely that the tightening labor market will push wages and therefore labor costs upwards which should translate into higher prices for services and labor intensive goods. And we are already experiencing rapidly climbing rents and health care costs.

The current headline inflation got curbed by the drop of the energy prices. Today oil is around 60% cheaper than summer last year and gasoline prices at the pump dropped about 30% (fuelgauger). But this disinflationary effect could disappear soon. In 2016 the statistics will compare the prices then with today´s prices (oil at $50 and gasoline at $2.30). If commodity prices recover this fall or in 2006 then their advances would add onto the inflation rate. 

In the moment the oil price is already 15% above its low from late August ( CO1). A fierce oil price rally in August (plus 27% in around 5 days) was a warning and a reminder to 2009 as low interest rates combined with QE kickstarted a massive oil price speculation. From spring 2009 to 2012 the price of oil tripled from $40 to $120 even in weak economic environment, financed by a supper accommodative monetary policy. According to Bloomberg the hedge funds are already betting on climbing energy prices (bloomberg).

The fed would behave wise if they correct their mistake as soon as possible, which would be in October when the next meeting is due.