Friday’s ‘good’ employment numbers have finally given the Fed definitive green light for starting next week on Wednesday, December 16, its long way to normalization.
As far as the path of the dollar is concerned, we could be bound for some surprises as the events on December 16 could very well turn out into something like the final act of a “buy the rumor sell the fact” scenario, which is of course not a sure thing.
But, for example, when we look back at what happened in the recent past when the Fed hiked in June 2004 by 0.25 percent, we saw during the 3 months that followed the dollar declining by 2.3 percent. The same occurred in June of 1999 when the Fed hiked by the same percentage points and thereafter the dollar went down by 4.4 percent over the same time span, as well in February in 2004 when we had a 0.25 percent rate hike the dollar went down by 3.6 percent during the 3 months that followed.
Of course, past performance does not guarantee future results and yes, this time could be different…
Looking a little bit more forwards into 2016 in the employment area we see wage growth is only at about 1.50 percent, which puts it close to its worst historical performance, which is a fact the FOMC will have to take into account now and in the future.
So far, only the “unemployment rate,” the “marginal attached” and the “job openings rate” are above their normal levels.
Now, what is still not taken into account in these data, and this is not a complaint as it is still impossible to do it effectively, but we cannot overlook the fact we are in the midst of a new industrial revolution that has and will impact employment, which probably will all not be positive I’m afraid, and where “disruptive technologies” advances will continue to transform our lives, the way we do business, which includes of course how we create employment, and therefore how the overall global economy will perform and "where" and how the well-being of the populations will evolve.
Recent studies already signal the new and ongoing industrial revolution (No, we haven’t seen the end of it, not by a long shot!) will have a potential economic impact of between $14 trillion and $33 trillion per year in 2025 while the big unknown remains how will overall employment be impacted by these “disruptive technologies.”
By way of comparison, the IMF calculated at the end of 2014 world GDP stood at about $77 trillion.
Besides all that, St. Louis Fed President Mr. Bullard said (on Friday) “My argument has been that the FOMC’s goals have been met, while the FOMC’s policy settings remain extreme … prudent policy suggests edging the policy rate and the balance sheet toward more normal levels.”
He recalled that labor markets are close to normal and inflation, “net of the oil price shock,” is reasonably close to the Fed’s 2 percent target. Interestingly he remarked the Fed’s policy rate remains 3.25 percentage points "below" the FOMC’s long-run level, and the Fed’s balance sheet remains more than $3.5 trillion larger than its pre-crisis level.
Mr. Bullard told the audience at the Philadelphia Fed Policy Forum, “implicit” in his argument to begin normalization is a desire to return to the 1984-2007 macroeconomic equilibrium, which was characterized by relatively long economic expansions, relatively shallow recessions and relatively good monetary policy that was well understood by policymakers and financial markets and that equilibrium was associated with a higher nominal interest rate structure than we have today,”which is in my opinion a very important statement.
He concluded his intervention saying, “My current policy position remains in favor of beginning policy normalization in the U.S.”
Long-term investors could do well being on alert that in 2016 divergences in inflation- and monetary policy rate settings between U.S. and the other G7 countries, which are the besides U.S., the UK, Japan, Germany, France, Italy and Canada, will likely diverge further, which will, in case that occurs, cause more volatility in the broad markets. The divergence between the U.S. and the Emerging Economies will follow but will probably cause more disruptive results.
In simple words, “Investors should better not expect a smooth ride in 2016.”
Etienne "Hans" Parisis
is a Belgian-born bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.
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