Reporting today that the unemployment rate hit a 50-year-low of 3.6%, the Labor Department reported, adding 263,000 jobs in April. While all that seems rosy, Federal Reserve Chairman Jerome Powell met with his Open Market Committee May 1, holding the Federal Funds Rate—the rate the Fed lends to big banks—to 2.5%, over five times the size of when former Fed Chairman Ben Bernanke dropped the key lending rate to zero to 0.25% Dec. 16, 2008 during the so-called Great Recession. Bernanke’s easy money policy changed when his successor Chairman Janet Yellen stopped quantitative easing AKA QE3 Dec. 18, 2013, eventually raising the Federal Funds Rate six times to between 2013 and 2018 to 1.75% when she finished her term. After taking office Feb. 5, 2018, Powell raised the Federal Funds Rate three times in 2018, to its current rate of 2.5%, prompting a 25% market sell off in 2018.
Watching the stock market sink in 2018, Powell decided to hit the pause button on more rate hikes, most recently May 1, when he decided to leave rates untouched. Given the 50-year-old record unemployment rate, Powell decided to leave rates alone because of low inflation numbers. While 72-uyear-old President Trump has much to be proud of with the U.S. economy, Powell’s decision to hold rates flat, given low core inflation, indicates that there are warning signs on the economy, including less consumer spending. With consumer spending two-thirds of the nation’s Gross Domestic Product [GDP], Powell worried more rate hikes could trigger another stock market sell-off. Powell looked at the Labor-Force Participation Rate [LPR] that watched the labor market shrink by some 500,000 jobs. January’s Labor-Force-Participation rate dropped from 63.2% to 63.8%, trimming the unemployment rate.
Retirement of baby boomers accounted for a sizable drop in the Labor-Force Participation Rate, whose participation in the labor force dropped compared to the amount of younger workers seeking employment. Whatever factors contribute to a shrinking labor force, the jobs market remained strong by historic standards. Wall Street groaned May 2, following Powell’s decision to not cut rates, prompting criticism by Trump and his chief economic adviser Larry Kudlow. As long as inflation seems tame, Trump sees know reason why Powell should not switch to an easy monetary policy. Trump fiscal policy, passing the most sweeping tax cuts since President Ronald Reagan in 1981, has added to the nation’s 3.2% GDP rate, a 300% improvement over former President Barack Obama. When Trump said he could see a 4% growth rate at the end of his first term, his critics laughed.
Whether or not the 3.2% GPP growth continues is anyone’s guess. .With Europe, China and India looking at contracting economies, only the U.S. looks robust enough to continue through 2019, possibly into 2020. Many business leaders and economists had predicted recession in 2018, when it fact the economy continued to expand. Powell sees some headwinds ahead preventing him for hiking the Federal Funds Rate. Labor-force numbers fluctuate month-to-month, not something the Fed’s too worried about. Overall 2018 wage-growth only rose 1.1%, giving a truer picture of the Fed’s low inflation numbers. If consumers continue to spend their disposable income on rent and health care, they won’t have the discretionary income needed to boost consumer spending. When you consider food and energy, today’s consumers don’t have much left after paying rent, mortgages and food.
After watching the Wall Street meltdown in 2018, it’s a relief that markets have bounced back in 2019, closing in on record highs. Heading into an election year, the Fed typically holds interest rates steady, helping the struggling residential real estate market. Powell’s rate hikes added about fifty basis points to current mortgage rates, leaving buyers paying more for residential mortgages. As long as rents remain high and energy costs continue rising, it’s not going to fuel a boom in residential real estate, whether new or existing home sales. Given the rising interest rates, it’s not going to help consumer spending, as consumers pay more for big ticket-item loans like cars and major appliances. High rents and mortgages continue to hamstring consumers’ ability to improve U.S. GDP. There’s little Trump can do to stop rising interest rates and high energy costs putting a drag on the economy.
Trump’s got much to crow about when it comes to the U.S. economy but knowing that things could turn on a dime. As long a rents and mortgage rates remain high, consumers won’t have the discretionary spending needed to boost GDP growth. No matter how you cut it, it’s a good thing when the unemployment rate drops to 50-year-lows. But it doesn’t deal with high rents, exorbitant health care costs and rising consumer interest rates. Congress has done little to deal with excessively high consumer interest rates, adding consumer default rates, not to mention bad student debt now approaching $1.5 trillion. Halting more rate hikes, Powell gets the fragile nature to the U.S. economy, capable to heading south quickly, without much provocation. “The U.S. economy is in good shape in the spring 2019,” said PNC chief economist Gus Faucher, noting that things could change.
