June 15, 2015    3 minute read

Why Yellen Won’t Hike Rates

   June 15, 2015    3 minute read

Why Yellen Won’t Hike Rates

Since the beginning of the year, the markets and investors have been speculating as to when the FED would raise interest rates. It is perhaps not likely in the next FOMC meeting, given that the advantages to the US for keeping rates lower for longer outweigh the disadvantages from rising rates.

Three factors heavily influence Yellen’s decision:

  • Conditions in the labour market
  • US growth prospects
  • Inflation

The first factor is measured through the Non Farm Payroll, a pivotal macroeconomic indicator which is recorded by the U.S. Bureau of Labor Statistics intended to represent the total number of paid U.S. workers of any business, excluding those working for non-profit or governmental organisations.

Recent NFP figures indicate that the US job market has not yet completely healed. It can be seen from the picture below how just on May the NFP was above the expectations, with 280,000 jobs created, recovering from an especially disappointing set of figures in March. Whilst there is considerable improvement over the past year, the labour market is far from stable or on a sustainable trend, which would spur Yellen to raise rates.

united-states-non-farm-payrolls

A tightening of the monetary policy is not justified by the US growth in GDP which some regard as very mild. Those that are bullish on the US economy may argue that the poor figures are due to the harsh winter and thus it doesn’t reflect the actual conditions of the US economy, others argue that in any case, even in the previous period, the growth has not been high enough. The latter view can be backed by the fact that the consumer spending growth has been below expectations, therefore the lower than expected GDP growth rate is also due to consumers that might have changed their behaviour.

As it can be seen from the chart above, the US economy, over the past two years, has grown at a rate of the 2.4%. There is some probability that the growth in the second quarter will be below average, with an overall growth of 2.5% during the 2015. If one considers other situations in which the FED tightened monetary policy, the GDP growth was beyond the 3% threshold.

Considering that consumer prices have been falling this year, it is not still the moment to tighten monetary policy, as the move would stave off inflation.

united-states-inflation-cpi

The first 4 months of 2015 have seen deflation: this is probably due to the strengthened dollar because of the weakness of the developed world. Whilst the US economy is slowly strengthening, and a rate hike being somewhat unlikely, it will be very interesting to hear more from the publishing minutes of the FOMC meeting, to understand what is keeping Yellen up at night.

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