Fed Mandates and Economic Cause and Effects

The last few posts have been light on deep technical stuff, given the weather, holiday party, and time of year. Well we just couldn’t handle it any more, as such, here is a little deeper look at some of the Economic releases lately that have put a bid in the capital markets, as mentioned last week “Markets get Jiggy.”

Nonfarm Payroll Report

One of the top most watched reports as of late is the payroll report. In part due to the fact that the FOMC has stated they are closely watching, and with a FED mandate of  “Maximum employment” look not further than the Nonfarm Payrolls Report.

Two hundred thousand new jobs monthly has been noted as the line in the economic sands that put just enough wind in the sails to allow the FOMC to begin letting off the QE (Quantitative Easing) pedal. Several consecutive months of  a strong jobs gain should give the FOMC enough confidence the economy is moving fast enough to go it on its own.

12-10-13 Non Farm Payroll Econoday

Unemployment Rate

6.5% is the key number drawn in the sand, this time by the FOMC themselves. Ben Bernanke, desiring a more transparent FOMC during his tenure, literally has directed investor attention to a 6.5% threshold in this rate for his easing of help via QE.

This number however has a second component that can cause it to be skewed, the participation rate. The participation rate are those who are attempting to find a job. If the participation rate falls (less are looking) which it has over the last year, the unemployment rate can/may look artificially lower than reality. Not to worry, the FOMC also knows this and as such have given signals they may include other factors.   Participation skewed or not, it is certainly very nice to see this trending down from the double-digit rates we saw during the 07-09 recession.

12-10-13 Unemployement Rate Econoday

So What Does it all Mean?

IF these Economic numbers and a few others align, and stay on track, the FOMC would be able to slow the asset purchases (QE) that are artificially lowering interest rates, allowing rates to rise.

Two important items:

  1. Another Fed mandate is “Moderate Long Term Interest Rates“.   Most including ourselves, expect them to attempt to allow longer term rates to gently float upward. This is of course not the way it always works in capital markets, but time will tell.
  2. Unfortunately, longer term rates have little effect on the money we earn in our money market, checking and other SHORT TERM rates as this is known as the Fed Funds Rates. Short term, Fed Funds Rates are expected to remain low until the economy gets a stronger head of steam. Most professional investors are modeling an increase in late 2015 or 2016, but ANYTHING can happen over such a long economic time period.

Apologies for the length of this post, we did not intend to get so long-winded, but again as mentioned last week, we wanted to follow-up on a couple of Economic reports that had garnered much attention.

Have a Great Day!

John Kvale CFA, CFP

8222 Douglas Ave # 590
Dallas, TX 75225

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