Holding the Federal Funds Rate steady at 0.25%, 69-year-old Federal Reserve Board Chairwoman Janet Yellen switched gears after the June 3 Labor Department report showing the nation only added 38,000 non-farm payroll jobs in May. Yellen sang a different tune April 27, hinting that the Fed’s Open Market Committee [FOMC] would raise rates as soon as June 15. Yellen’s decision to put rate hikes on hold signals the U.S. economy has begun to run down hill. May’s lower-than-expected jobs report threw FOMC members for a loop, prompting Yellen to signal that expectations of rate hikes have changed. With U.S. Gross Domestic Product running under one percent, Yellen shouldn’t have hike rates Dec. 15, 2016. When Yellen stopped the third round of quantitative easing or bond buying Oct. 29, 2014, she hoped that the historically low rates were enough to stimulate the economy.
May’s anemic jobs report signaled that six-year-old bull market was beginning to peter out, surprising Fed governors that nearly record low unemployment would stimulate GDP growth. Dipping to 4.7%, the unemployment rate has become a poor predictor of GDP growth because of “underemployment,” a term designating too much part-time, low-wage employment. Part-time or minimum wage workers factor into today’s unemployment picture. With the exception of Nov. 19, 2001 Transportation Security Administration [TSA], created in the ashes of Sept. 11, with 55,600 employees and budget of $7.55 billion, federal jobs haven’t grown since 1998. Despite population growing from 281,421,906 in 2000 to 308,745,538 in 2010, federal jobs have shrunk by over 200,000. Former Federal Reserve Board Chairman Ben Bernanke warned Congress to stop shrinking federal jobs.
During the 2008 economic collapse, Beranke took draconic steps to avoid another Great Depression, lowering the Federal Funds Rate to zero Dec. 17, 2008. Yellen’s decision to hike that rate by only 0.25% Dec. 15, 2015 was an optimistic move about future U.S. economic growth. For most of 2016, economists have debated the possible impact of Yellen hiking rates, something that hasn’t happened. Yellen’s decision today to keep rates on hold signals trouble for the U.S. economy. Less than two weeks from the U.K.’s Brexit vote to leave the European Union, Yellen sees the potential impact of Britain leaving the EU. European Council President Donald Tusk warned that a Brexit vote could destroy Western political civilization, anticipating a possible domino effect, spreading contagion to the EU, perhaps causing other defections from the European Common Market.
Showing what a difference a month makes to the Fed, Yellen sounded less optimistic about U.S. economic growth. “We are quite uncertain about where rates are heading in the longer term,” said Yellen, signaling to markets that GDP continues to linger close to recession. Yellen expressed confidence at last months FOMC meeting that the Fed was on schedule to hike rates at least two more times in 2016. Lowering economic growth from 2.2% to 2.0%, Yellen signaled that 2017 wouldn’t be too much different. Some business tycoons like Equity Group’s Sam Zell and billionaire Hedge Fund trader George Soros have warned about recession in 2017. Yellen’s pause spells bad news for Democratic front-runner former Secretary of State Hillary Rodham Clinton asking voters to continue Obama’s economy legacy. With the economy sputtering, it gives voters reason for change.
Yellen hasn’t yet figured out what seems obvious to many leading economists, including former Fed Chairman Bernanke: That the slowdown in federal employment over that last 18 years has stalled the economy. Without well-paying jobs from federal employment, consumers don’t have the cash needed to spend into the consumer economy. Part-time and low-wage jobs aren’t enough to fuel the kind of consumer spending needed to increase GDP growth. “While the recent labor market data have on balance been disappointing, it’s important not to overreact to one or two monthly readings,” said Yellen, looking ahead to more positive June numbers. Whether Yellen looks overly optimistic is anyone’s guess. What’s certain is that 18 years of losing federal jobs has put breaks on U.S. economic growth. Low-wage and part-time jobs can’t boost U.S. GDP.
Yellen and her Fed governors all wanted to continue hiking rates, a clear sign the economy was growing. Today’s announcement on rates sent Wall Street heading for the exits, realizing the economic growth has slowed. “It’s as dovish as the Fed can get without actually cutting rates,” said Brian Johnson, chief portfolio manager at Wells Fargo Fund Management. “Even [Kansas City Fed President] Esther George withdrew her dissent. The path of rates is lower, which is a big dovish swing,” telling Wall Street it’s time to sell off. If present trends hold, cutting rates won’t be enough to stimulate the economy. Between now and the June jobs report, investors will look gun-shy, unwilling to gamble on more GDP growth. Whether June’s jobs report hits guidance or not, the problems with shrinking federal employment will continue to dog U.S. GDP growth for the foreseeable future.
