Is The Fed Playing Where’s Waldo With The Economy?

August 7, 2017 at 9:27 am Leave a comment

That is the question I pondered on Friday as I settled in for a long weekend at a lake house outside of Cooperstown, New York. As the Fed nudges the Fed Rate higher at what point will consumers expect a greater return for placing their deposits with you? Or as the WSJ put it in this great article ” For now, most bankers are happy to keep deposit yields low, standing pat even as the Federal Reserve hikes short-term rates. No one is sure, though, how long customers will tolerate that.”

The chart accompanying this  blog (which I created using the FRED website) demonstrates that something really strange is going on here: on the one hand employment is that a 16 year low;  on the other hand inflation has Hardly nudged and wage growth has been anemic. Not surprisingly interest rates on  12 month certificates of deposit  are flat.

History says it’s not supposed to be this way. After all, the Fed has gradually been raising rates and has signaled that it intends to start selling  all those mortgage back securities back into the economy, but despite impressive  job gains we haven’t seen the type of upward pressure on wages that would make raising rates the logical thing  for your credit union and the Fed to do  The WSJ reported that from a year earlier, average hourly earnings increased 2.5%, in July  thanks to a 9 cents-an-hour increase from the prior month. That is slower than normal in the past  quarter. In fact,  one of the reasons the market is booming is because it’s the only place persons planning for retirement can make any money off their money.

Which brings us back to Where’s Waldo? If you read their analysis  or listen to their interviews economists  are convinced that inflation is hiding  out there somewhere, they just haven’t looked in the right place  yet.  Conventional wisdom says they are right but if they are wrong than we aren’t anywhere near  the point  yet where the Fed should raise rates again or  your  members will demand a higher return on their deposits

Entry filed under: Economy. Tags: .

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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