Low Labor Market Numbers in May Influence Interest Rate Hike

In her latest assessment of the economic performance of the US, Federal Reserve chairperson Ms. Janet Yellen gave a positive outlook but left investors in a dilemma. Many expected her to give a definitive timeline on when the interest rates hike would take place; but in her wisdom she refrained from mentioning anything to do with timelines. This was unlike in her May 27th address where she had mentioned that the rate hike would be implemented “in coming months”.

Her decision could have been advised by what she termed as disappointing US labor market report released about a week before the Federal Reserve Committee meeting in Washington DC next week.

According to the US labor department, the US economy only added 38,000 jobs in May; this being the lowest job gain on a monthly basis since 2010 and about just a third of the 123,000 jobs added in April 2016. The cause for the dismal performance is speculated to be an increase in the number of part-time workers and a rise in the number of people who stopped looking for work.

However, inspite of the slowing demand and productivity coupled with low labor market report numbers, Ms. Janet Yellen was optimistic that the economy would experience an upswing and necessitate a rate hike. Citing inflation and overseas risks as some of the risks the US economy is currently facing, she however downplayed their potential of having a significant effect on the economy.

Oil prices rising and liquidity increasing

After a depressed and disappointing start of the year, the global financial markets are warming up again. Commodity markets are also on the rise with the oil prices edging further north and nearing $50 a barrel. Towards the end of last year as supply surpassed demand, the oil prices started falling from the highs of about $140 per barrel to the lows of below $30 per barrel early this year. But the trend is picking up albeit with a few challenges in some oil producing countries like Nigeria where the book haram terror group is curtailing production processes. With rising oil prices, investors will therefore have more upside opportunities trading in alternative investment vehicles but after having an in-depth analysis of the markets.

Shale oil production is also expected to pick up under the lure of the rising oil prices. Analysts estimate that the shale oil producers need to get to the critical break-even price of $30 to $50 to start increasing their production. With the current prices at about $49 per barrel and still rising, the shale oil producers’ upscale of their contribution to the oil market cannot be overlooked. The effect of their increased production would however add to the glut in the market and start pushing prices back lower in the long-run.

With the expected rising interest rates, more investors are now channeling their money back home to take advantage of the safe investments back here. This is resulting with a capital flight from developing and emerging markets where the risk of investment is much higher compared to the risk of investment in the US. As the amount of money supply increases in the US, liquidity also goes higher and results in demand push inflation as more households get additional income at their disposal to spend. This inflation rise risk is what the Federal Reserve will have to be keen on monitoring and maintaining within the required range for a balanced economic growth.

One way to keep the inflation in check will be to raise the interest rates in the near future. This will result in a reduction in money supply within the economy as investors allocate their money to fixed income investments.

The date for the expected rate hike is not yet clear, but most analysts agree that it is not going to happen in June or July as earlier on expected. Most economists have pushed their predictions further ahead to September when they believe that all economic factors will be favoring a rate hike. Until then, we can only wait to see how the markets react after the Federal Reserve Committee meeting next week.

Published on Jun 20, 2016
By Nikolai Kuznetsov

Copyrighted 2020. Content published with author's permission.

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